EGB OPTIONS: Correction on the OAT Call Option

Post-PPI cues from U.S. Tsys leads Bunds & gilts away from session lows, although benchmark 10-Year futures for both markets are nowhere near testing pre-existing session highs.

• German yields back to little changed on the day across the curve, while the gilt curve bear flattens (yields 1-3bp higher on the session).

The implied probability of a government shutdown on October 1 dipped below 40% after White House officials gave Congressional Republicans the green light to move forward with funding negotiations if White House 'anomalies' are included. While the baseline expectation now leans toward a deal, the risk remains elevated. 

• Politico reports the Trump administration and hardline House conservatives want a stopgap funding plan through January 31 or beyond. Appropriators want a shorter continuing resolution to allow for full-year funding negotiations.
• Senate Minority Leader Chuck Schumer (D-NY) remains adamant he won’t swallow another partisan funding extension after being panned for folding in a March standoff.
• This time around, Schumer and House Minority Leader Hakeem Jeffries (D-NY) are aligned on their priorities but it is not immediately clear what concessions from the GOP could facilitate a deal beyond extending expiring Affordable Care Act (Obamacare) tax credits, which GOP Leader John Thune (R-SD) appeared to rule out yesterday.
• Punchbowl writes, “This is a growing political problem for moderate Republicans, as more than four million Americans could lose coverage without the subsidies. Rank-and-file Democrats say an extension of Obamacare credits is their minimum demand...”
• Axios writes, “The pressure is rising on Democrats to stiff President Trump and let the government shut down on Oct. 1… a shutdown fight might be the only action that appeases their deeply unsatisfied party base.”

Figure 1: Government Shutdown by October 1

Source: Polymarket

E-mini futures point to positive opens on Wall Street despite edging away from best levels. Oracle indicated ~35% higher pre-market after a guidance upgrade linked to the company’s cloud business outlook.

• S&P 500 e-minis: +0.52%
• NASDAQ 100 e-minis: +0.57%
• DJIA e-minis: unch