GILTS: Curve Bull Steepens After 2s10s Registers Fresh Cycle Low

• French OAT is taking the lead lower here with the best volume of the day going through, albeit still below averages.
• OATZ6 is sold in just 1.5k cumulative.
• This helps keep the OAT/Bund spread wider by 2.6bps which could impact the EUR and Euopean Equities.
• Immediate support for OATZ6 is at 107.76.

Ireland has announced it will be looking to sell E1.00-1.25bln of the 3.10% Jun-36 IGB (ISIN: IE000O6GBYC9) at its auction this Thursday, October 15.

The latest round of sell-side notes that we have read show increased focus on the Budget, albeit with little in the way of observable overt worry surrounding the event. There is also focus on the hawkish shift in BoE communique, along with the ongoing importance of energy prices:

• Bank of America: We expect a funding need increase of £10bn on 28 October, with this met by extra T-bill sales, and shorter WAM via within-remit adjustment to the maturity mix.  We retain our bullish view on forward real yields. A month ago, we recommended receiving the forward real yield between UKTi 2035s and 2038s at 332bp. We set a target of 275bp and a stop-loss at 360bp (currently 336bp). Risk to the trade is material fiscal slippage.
• BMO: Fiscal rules will no doubt be met: we do not believe “headroom” size will matter much to gilts, especially given the impending spending review – and that the reference year falls after the next General Election. Fiscally, the UK remains relatively attractive, with “middle of the pack” debt/GDP, and a better-than-most deficit. The UK’s relatively robust fiscal position would justify gilt yields being about 100bp lower vs peers than they are, in our view. What keeps gilt yields relatively high, we argue, is not fiscal but monetary policy (the high inflation tolerance of the Bank of England plus inflationary government policies). The UK’s 5y5y yield spread over peers is entirely due to the inflation component, with the real yield spread at zero. Therefore, the effect of the Budget on inflation & GDP growth prospects is more important than fiscal changes. Too much stimulus would be bearish, like Reeves’ first Budget; a more restrictive package bullish, as in March 2025.
• Goldman Sachs: Recent BoE communication has erred on the hawkish side. Against a backdrop of sustained energy price pressures and the September MPC opening the door to policy tightening, we expect front-end rallies to remain limited. The ongoing upward pressure on interest costs will continue to constrain the budget outlook into 28 October. A decline in fiscal headroom has been well-flagged, but the widening of deficit projections across successive fiscal forecasts illustrates this challenge. Near-term issuance will remain a key focus, and limiting near-term fiscal slippage is important to prevent a build in gilt risk premium. Net gilt supply to the private sector is poised to decline over the coming years, though current projections likely understate future supply if yields remain elevated. Helped by a friendlier BoE QT profile, we expect this to support gilts vs swaps. That being said, we continue to expect the energy outlook to remain central to the trading outlook.