US TSY FUTURES: Extending Highs, Volumes Rising
- Treasury futures continue to extend the top end of the range into the NY open, TYH6 +4 at 112-20.5 -- one week highs -- volumes rising with the 10Y contract just over 170k at the moment (Europe closed for extended Christmas holiday).
- Curves steeper: 2s10s +1.498 at 63.888, 5s30s +1.990 at 109.550.
- Projected rate cut pricing gaining vs. late Wednesday levels (*): Jan'26 at -4.4bp (-3.3bp), Mar'26 at -14.5bp (-12.3bp), Apr'26 at -20.9bp (-18.1bp), Jun'26 at -35bp (-31.1bp).
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GILTS: Second Round Bid Kicks In
Market reaction surrounding the budget & OBR forecast remains fickle, focus now seemingly swinging back towards to the lower-than-expected cash requirements, which limits upside to the gilt remit revisions. Meanwhile, nothing that has been published is set to dissuade the BoE from easing December, supporting the front end. Still, prior session highs untested across the curve.
EUR: FX Exchange traded Option
- EURUSD (5th June) 1.1600c, bought for 0.02450 in 1.7k.
The underlying is higher than the spot at 1.1688.
UK: Budget & Forecasts Set Stage For Political Battle On Tax vs. Spend
With the measures included in the budget accidentally published early by the OBR, there will be little market interest in Chancellor of the Exchequer Rachel Reeves' budget statement, currently being delivered in the House of Commons. From a political risk perspective, the focus will turn to how Reeves frames the decisions made and how effectively the Chancellor explains the factors behind the OBR's forecasts on growth, productivity, investment, and spending.
- The OBR forecasts have the government's overall spending on welfare at GBP16bln/year higher than its previous forecast in March. This significant increase (coming following the reversal of the Personal Independence Payment cuts and the two-child benefit cap), combined with the tax hikes contained in the budget, could set the dividing line for the next election.
- Labour will argue the hikes are needed to fund stronger public services and support vulnerable people. The Conservatives and Reform UK counter that Labour stands for tax-and-spend economics and is punishing workers to fund those on benefits.
- Ben Riley-Smith at The Telegraph posts on X: "Labour promised £8.5bn of tax rises in their manifesto at the 2024 general election and no massive hike. Scroll on 16 months and taxes have been increased £66bn across Rachel Reeves's two Budgets. That is more than seven times what Labour told the electorate they would do last year. Did they mislead the public on their tax intentions? That question and row is at the heart of the Labour Government's current unpopularity."
