OAT: Downside Still Contained By 70bp Despite Social Security Bill Passing

Gilt/Bunds slightly wider on the day, out to 180.5bp after failing to hold a break below 175bp last week.

• We noted that room for gilt outperformance (from a tactical perspective) had narrowed ahead of last week’s BoE decision but did flag some potential medium-term drivers of gilt outperformance vs. German paper (a dovish BoE outcome, various possible fiscal measures and a reduction in gilt issuance).
• UK paper hasn’t manged to benefit from the dovish hold that the Bank delivered as of yet, taking cues from wider sentiment in the times since.
• However, Goldman Sachs have recommended entering Gilt/Bund tighteners at 180bp (target 140bp, stop 205bp).
• They note they “think the MPC’s message was gilt supportive. Our economists now expect a cut in December, and three further cuts by the July meeting as disinflationary pressure gains strength. For the time being, focus will shift back to the Autumn budget, which we expect will add fiscal drag and reinforce disinflation, which is set to drive inflation differentiation vs. Europe”.
• Goldman also expect this recommendation to garner support from the supply picture, arguing that “gross gilt issuance needs are below those of Germany in 2026. We also note that the sharp increase in pickup of BoE repo facilities may strengthen the argument for slowing down QT”.

Eight centrist Democrats yesterday took the first step toward reopening the government, voting with Republicans on a new Continuing Resolution to fund the US government through January 30. The package provides backpay to furloughed federal workers and includes a three-bill Fiscal 2026 appropriations package covering Agriculture, Rural Development, and FDA, Military Construction and Veterans Affairs, and Legislative Branch.

• The deal includes a commitment for a Senate vote in December on renewing the expiring ACA tax credits, but as it does not include a commitment from President Donald Trump or House Speaker Mike Johnson (R-LA), it is unlikely to pass, especially considering Trump’s recent activity on social media decrying the ACA as a ‘scam’.
• Senate Republican leadership are eying final passage today, but Senate Minority Leader Chuck Schumer (D-NY) is unlikely to provide the votes to fast-track the process. The government is likely to be reopened on Wednesday, at the earliest. Punchbowl points out that none of the Democrats who voted 'yes' are up for re-election in 2026, insulating them from blowback from progressives.
• The deal fails to achieve Democrats’ core demand of an extension to Affordable Care Act subsidies, but does secure small wins with a promise to backpay federal workers, resume withheld federal payments to states, and a provision to reverse federal layoffs made during the shutdown.
• Democrats will also claim a win by fully funding Supplemental Nutrition Assistance Program (SNAP), although as the programme is funded via mandatory spending in the Department of Agriculture’s annual spending bill, it wasn’t at risk of being cut.  

A weaker USD supports gold, with spot trading ~$80/oz higher at $4,079/oz.

• Resistance at the October 31 high ($4,046.2/oz) has been breached, switching focus to the October 22 high ($4,161.4/oz).
• Our technical analyst had stressed that the recent pullback in bullion seemed corrective.
• Note that the move in gold seems somewhat larger than is justified by the degree of weakness witnessed in the greenback.
• Some have pointed to tentative steps towards the reopening of the U.S. government as a dovish signal (as it moves us closer to the resumption of official U.S. data releases, which could embolden Fed easing).
• However, this is at odds with the hawkish adjustment seen in the U.S. short end through early Monday trade.
• A reminder that long gold was one of the favoured trades until the pullback seen in recent weeks.
• Today’s move could simply reflect ongoing positive sentiment towards gold (magnified when there are gold-positive developments), helping to at least partially explain the outperformance vs. the fundamental inputs
• Elsewhere, recent headlines note that the Shanghai Gold Exchange is set to waive transactions fees for some gold contracts from tomorrow until the end of ’26, a marginal gold positive.