GILTS: 2s5s10s Fly Nears Early April Highs
Dec-10 11:39
The hawkish repricing derived from moves on the EUR strip has led to the belly selling off on the 2-/5-/10-Year gilt butterfly.
- Markets give greater consideration to the timing of the end of the BoE’s easing cycle, as well as any spillover from a potential hiking cycle at the ECB.
- Underperformance of the belly of the fly is further underpinned by the market continuing to price another ~50bp of BoE rate cuts and ongoing skew away from long end issuance by the DMO.
- 5s have cheapened by nearly 10bp on the structure month-to-date, with the next upside level of note located less than 2bp away at April’s closing high (-30.73bp).
- BMO note that “yields are still much more expensive on the fly than at the end of past rate cut cycles”, suggesting that 5s could cheapen by at least another 30bp on the structure as “the rate cycle reaches its trough”.
Fig. 1: UK 2-/5-/10-Year Butterfly (bp)
Source: MNI - Market News/Bloomberg Finance L.P.
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OUTLOOK: Price Signal Summary - USDJPY Trend Needle Points North
Nov-10 11:38
- In FX, EURUSD has recovered from its recent lows. The move higher, for now, appears corrective. A short-term recovery is allowing a recent oversold condition to unwind. Resistance to watch is the 20-day EMA, at 1.1587. It has been pierced, a clear break of it would signal scope for an extension towards the 50-day EMA, at 1.1627. The trend remains bearish. A reversal would refocus attention on the bear trigger at 1.1469, the Nov 5 low.
- A bear trend in GBPUSD remains intact and the latest recovery appears corrective. The move higher is allowing an oversold trend condition to unwind. Firm short-term resistance to watch is at the 20-day EMA, at 1.3237. A break of this hurdle would signal scope for an extension towards the 50-day EMA, at 1.3340. A resumption of the downtrend would pave the way for an extension towards 1.2971. The bear trigger is 1.3010, the Nov 4 and 5 low.
- The trend structure in USDJPY is unchanged, it remains bullish and the latest shallow pullback appears corrective. Moving average studies are in a bull-mode position, highlighting a dominant uptrend. The bull trigger is 154.48, the Nov 4 high. A break of this level would confirm a resumption of the uptrend and open 154.80, the Feb 12 high. First important support to watch lies at 152.46, the 20-day EMA.
STIR: Fed Rate Path Buoyed By Improved Shutdown Ending Odds
Nov-10 11:37
- Fed Funds implied rates are a modest 0.5-1.5bp higher for meetings out to mid-2026, helped by a marked improvement in odds of the government shutdown ending.
- Cumulative cuts from 3.87% effective: 16bp Dec, 25bp Jan, 35.5bp Mar, 41.5bp Apr, 55bp Jun.
- SOFR futures see larger moves, up to 4.5 ticks lower through 2027 contracts.
- It sees the terminal yield higher at 3.12% (H7) but still off Wednesday’s 3.16% marked the highest close since late July, following beats for ADP and ISM services before weaker alternate labor data and consumer sentiment over Thu-Fri.
- We don’t expect today’s Fedspeak to move the needle having heard from both recently.
- 0830ET - SF Fed’s Daly (non-voter, leaning dove) on Bloomberg TV. She’s spoken a few times since the Oct 29 FOMC, including in a blog post this morning firming her dovish leaning stance.
- 0945ET - St Louis Fed’s Musalem (’25 voter, hawk) on Bloomberg TV. He said on Nov 6 that policy is getting close to neutral and that the Fed needs to lean against above-target inflation. The labor market is around full employment but there are some downside risks to it.
EGB OPTIONS: RX Downside Being Rolled Out
Nov-10 11:32
RXG6 128 puts paper paid 52 on 8K vs. RXZ5 128.00 puts at 6.5, rolling out the curve.
