BONDS: Gilt/Bund Spread Moving Back Towards 200bp
Last week’s poignant reminder of the UK’s fiscal fragility halted the narrowing move in the 10-Year gilt/Bund spread, leaving the April closing low (186.8bp) intact, with the spread moving back towards 200bp in the time since.
- Tightening on the back DMO & BoE action to shorten the WAM of gilts offered to market, coupled with BoE Governor Bailey noting that the recent curve steepening will factor into the Bank’s September decision on QT, threatened a break below the Apil closing lows in the spread.
- This was before the UK government was forced to water down its welfare reform package, with the subsequent sell off in gilts (also partly attributable to short-lived questions over the future of Chancellor Reeves) underscoring the idea that the UK may struggle to pass meaningful spending reforms moving forwards.
- This increased the odds of tax hikes as soon as the Autumn and highlighted the fragile fiscal situation evident in the UK at present.
- Meanwhile, on the German side, while the country’s newfound desire for fiscal loosening is a definite step change, the potential lack of viable investment vehicles has many suggesting that the full envelope of tabled fiscal spending will not be utilised.
- Still, we stress that the upside risk to German issuance over the medium-term is set to present cheapening pressure for Bunds vs. swaps.
- The fiscal evolution within both the UK and Germany is likely to drive the medium-term direction of the spread, with relative monetary policy stances and the higher beta of gilts to U.S. Tsys providing supplementary factors to consider.
- The chart below highlights the major support and resistance levels in the spread, which trades around 5bp below the middle of its year-to-date range.
Fig. 1: UK/Germany 10-Year Yield Spread (bp)
Source: MNI - Market News/Bloomberg Finance L.P.
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JGB TECHS: (M5) Rallies Off Lows
- RES 3: 147.74 - High Jan 15 and bull trigger (cont)
- RES 2: 146.53 - High Aug 6
- RES 1: 141.48/142.95 - High May 2 / High Apr 7
- PRICE: 139.19 @ 15:53 GMT Jun 06
- SUP 1: 138.54 - Low May 22
- SUP 2: 136.57 - 1.382 proj of the Jan 28 - Feb 20 - Feb 26 bear leg
- SUP 3: 134.89 - 2.000 proj of the Jan 28 - Feb 20 - Feb 26 bear leg
JGBs have rallied off recent lows, however a bearish theme remains intact following the reversal that started Apr 7. A continuation lower would signal scope for an extension towards 136.57, a Fibonacci projection. On the upside, a reversal higher would instead refocus attention on 142.95, the Apr 7 high. The first important resistance to watch is 141.48, the May 2 high. A break of this level would be viewed as an early bullish signal.
US TSYS/SUPPLY: MNI UST Issuance Deep Dive: June 2025
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- May’s refunding round saw guidance as well as coupon sizes for the current quarter unchanged.
- The August round (Jul 28-30) could prove more compelling, reflecting both pressure at the long end of the Treasury curve as well as a shifting fiscal outlook amid tariff revenues contrasted with impending tax cuts (not to mention the likelihood of approaching the debt limit at around that time if it’s not lifted).
- Future Coupon Upsizing: We’ve seen some expectations that Treasury could lean against some of those trends in the August refunding, with potential signals if not immediate action on adjusting buybacks or even reducing issuance duration in order to reduce pressure on the long end. MNI’s current expectation is that coupon sizes will only be increased in early 2026. We will update in our next Deep Dive at end-June, with our full refunding preview coming in late July.
- Upcoming issuance: June is set to see $315B in nominal Treasury coupon sales, in addition to $23B in 10Y TIPS and $28B FRN for a total of $366B. Sales for the month start in the coming week, on Tuesday June 10 with $58B of 3Y Note, Wednesday June 11 with $39B of 10Y Note, and Thursday June 12 with $22B of 30Y Bond.
- May Auction Results: Against a backdrop of continued steepening pressure for global sovereign curves, May’s coupon auctions saw strong sales at the short-end/belly contrasted with tails at the long-end.
US FISCAL: Extraordinary Treasury Measures Tick Up As Cash Depletes
Treasury had $84B in "extraordinary measures" available to keep the government financed as of June 4 per a release Friday. That is up from $68B a week earlier though Treasury has exhausted three-quarters of the total initially available ($362B) when the debt limit impasse began in January.
- Combined with a pullback in Treasury cash ($376B), the total resources available to avert an "x-date" in the summer are down to a total $460B, the lowest since April 10 before the annual tax take accelerated.
- There will be another uptick in Treasury cash late next week/early the following week around the mid-June tax date, but this is likely to be the last major uplift before the summer at which point x-date speculation will pick up if Congress hasn't passed a debt limit increase by then.
