GILTS: Curves Stabilise After Notable Flattening, Budget Remains Under Scrutiny

Gilt futures hold within yesterday’s range, with spill over from European national level CPI data limited as the market continues to assess the fallout stemming from the Budget.

• Contract last +6 at 91.56 vs. highs of 91.72.
• Initial support and resistance located at 90.53 at 91.93, bulls remain in technical control at this stage.
• Yields little changed vs. yesterday’s close.
• Curves stabilise around round numbers after Wednesday’s post-Budget flattening, 2s10s ~70bp, 5s30s ~130bp, following failure to break above 80bp and 145bp in recent weeks.
• Late on Thursday S&P warned that UK public finances remain constrained despite the measures outlined in the Budget, deeming the UK’s fiscal position to be “vulnerable” and a key constraint on the UK’s credit rating. The rating agency also highlighted risks to the fiscal consolidation plan, particularly towards the end of the forecast horizon.
• This mirrors ideas that we have outlined in our own work, with questions surrounding the likelihood of backloaded fiscal tightening being implemented trimming the post-Budget rally in gilts on Thursday.
• BoE-dated OIS little changed, pricing 22bp of easing for next month. SONIA futures flat to +2.0, implied terminal rate steady at ~3.35%.
• We still expect the BoE to cut rates next month and have outlined the feedthrough of the Budget into monetary policy in recent bullets.
• External cues are limited by the technical issues on the CME, which has halted Tsy futures trade for the best part of 8 hours.