BUNDS: Breaking through the Initial resistance

Gilts rally this morning, with crude oil lower and core global FI peers off their Asia-Pac lows.

• Futures as high as 92.12.
• Bears remain in technical control, initial support and resistance 91.42/92.19.
• Yields 1-3bp lower, curves flatter.
• 2s10s remains sub-80bp. A break above would expose the ’25 high (84.6bp).
• 5s30s registered a fresh year-to-date closing high yesterday. Upside focus is on the ’25 intraday high (147.2bp).
• Macro news saw mixed data out of China (GDP & monthly economic activity readings) and Nvidia restarting some chip exports to China.
• UK news flow has focused on seemingly impending mortgage reforms to be tabled by Chancellor Reeves.
• Note that Reeves will appear twice today, more prominently this evening, at the Mansion House event. BoE Governor Bailey will also speak at that event (21:00).
• Don’t expect much new from the latter after his dovish interview with the Times over the weekend.
• Meanwhile, CPI (Wednesday) and labour market (Thursday) data headline this week’s domestic calendar
• Expect our full preview of these events at some point today.

At 1500BST/1600CET today, French PM Bayrou is set to unveil the main proposals of the 2026 state budget, including spending cuts and tax hikes that risk collapsing his minority government. French political risks gradually been priced back into OATs in recent weeks, particularly when assessing French debt against semi-core/periphery peers. Last week, we highlighted a persistent tightening trend in the 10-year BTP/OAT spread, with markets eyeing full convergence if PM Bayrou is forced out of office.

• 10-year GGB yields have also moved below OATs this month, with the GGB/OAT spread currently below -2bps. Meanwhile, OATs have displayed renewed cheapening on the SPGB/OAT/PGB fly since the end of June.
• Bayrou has previously noted that E40bln in fiscal savings are required for the Government to meet its 4.6% 2026 deficit target.
• Without a majority, Bayrou is likely to be forced to use Art. 49.3 of the French constitution to push the budget through without a vote in parliament. The far-right RN party has threatened to vote in favour of a censure motion in the autumn should the PM utilise Art. 49.3, and with the parties of the left also on board, such a vote would be enough to remove Bayrou from office.
• This morning, RN MP Sébastien Chenu doubled down on his party’s threats, stating to BFMTV/RMC that “If you ask the French to make additional efforts, regardless of the category—workers, retirees, young people, civil servants—we will say no”.
• A backdrop of political risks and ongoing fiscal pressures did not stop French President Macron from announcing an additional E6.7bln in defence spending by 2027 on Sunday. Macron noted that this spending would not be financed by debt, but economic reforms and a "strength of soul" from the French people. No details were provided, but this is suggestive of the need for yet more fiscal consolidation. 

RXU5 123.50 puts paper paid 3 on +4.5K.