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10-Year gilts outperform Bunds by 5bp today, following the softer-than-expected UK labour market data.

• The spread is set for its lowest level since mid-May, last 201.1bp.
• Gilt bulls look to force a break back below the 200bp level, with a cluster of daily closing levels from late April through the early part of May then layered into 197.4bp.
• Longer term it is worth noting that May’s widening in the spread failed to break above April’s high (218.8bp), with the subsequent pullback leaving the spread just below the middle of the range witnessed since December.
• Relative fiscal and monetary stances are set to drive the spread over the longer run.
• Germany has already pledged meaningful fiscal loosening, while the UK’s fiscal fragility is well-documented and has resulted in a more active approach to issuance/liquidity management from policymakers in recent weeks (effectively shortening issuance WAM).
• A reminder that gilts are operating with a higher beta to U.S. Tsys than their German peers, which provides an extra layer of complexity given the volatile macro environment and recent swings in U.S. assets.

Fig. 1: UK/Germany 10-Year Yield Spread (bp)

Source: MNI - Market News/Bloomberg Finance L.P.