BONDS: Gilts Display Resilience With Supply Weighing On EGBs

Debate continues in Germany regarding the speed at which the presumptive new gov't should look to either reform the debt brake, or alternatively set up a separate 'special fund' to pay for a significant increase in defence spending. In the immediate term, parties continue to deal with the fallout of the federal election by organising their new leadership teams. 

• The centre-left Social Democrats' (SPD) Bundestag faction is meeting presently to elect a successor to faction chair Rolf Mützenich. Party co-leader Lars Klingbeil is set to take over, despite some within the SPD laying the blame for the party's worst electoral performance since 1887 at his feet. A statement is set to take place at 1100CET (1000GMT).
• The Bundestag faction for the pro-business liberal Free Democrats (FDP) will hold their first meeting since the election at 1230CET. The FDP failed to cross the electoral threshold and therefore the dissolution of the faction is imminent. There is the prospect its lawmakers could prove important over the next month if the incoming gov't seeks to use the current Bundestag to create any new 'special fund' for defence spending.
• Finally, the Bundestag faction of the Greens holds its first meeting since the election at 1300CET. The Greens lost 33 seats, taking its total down to 85 out of 630. The party is set to sit in opposition given the conservative Christian Democratic Union (CDU) and SPD hold a majority, negating the requirement for a tripartite 'Kenya' coalition.

The House of Representatives vote will ease some concerns from the Senate about the House’s ability to move legislation but there are still major obstacles to a final package. Senate leadership, including Senate Majority Leader John Thune (R-SD) and Finance Committee Chair Mike Crapo (R-ID), and key administration officials including Treasury Secretary Scott Bessent have argued that a tax package must make the TCJA permanent. 

• Thune, Crapo, and other senior GOP Senators wrote in a letter to Speaker Johnson and Ways and Means Chair Jason Smith (R-MO) earlier this month: "...we will not support a tax package that only provides temporary relief from tax hikes."
• As there is insufficient fiscal space within the House resolution for permanence, lawmakers are exploring when the TCJA could be addressed under ‘current policy’ rather than ‘current law’, effectively setting the cost of extending the TCJA at $0 rather than ~$4.5 trillion over 10 years.
• If lawmakers attempt to use a ‘current policy’ baseline it could set up a showdown with the Congressional Budget Office or the Senate Parliamentarian, an independent officer who determines if legislation conforms with the reconciliation process.
• The Senate could overrule the Parliamentarian but that would risk permanently weakening the Senate filibuster. Thune said in January, when asked if he could overrule the Parliamentarian: “…that’s totally akin to killing the filibuster. We can’t go there. People need to understand that.” 

House Speaker Mike Johnson (R-LA) scored a major win yesterday, with the House voting 215-213 to pass a budget resolution that will underpin a mammoth reconciliation bill covering the bulk of President Donald Trump’s agenda. 

• A flurry of last-minute talks, including direct calls between Trump and GOP holdouts, was enough to overcome opposition from a disparate group of moderates and deficit hawks. Rep Thomas Massie (R-KY) was the only GOP 'no' on the final roll call.
• The blueprint provides the House Ways and Means Committee USD$4.5 trillion to write up a tax reform package, including the extension of Trump’s 2017 Tax and Jobs Cuts Act (TJCA), and new proposals such as exempting tipped earnings from federal taxation and raising the State and Local Tax (SALT) deduction cap.
• The budget blueprint sets a floor of USD$2 trillion in spending cuts across a range of federal government departments, including USD$880 billion under the purview of the Department of Commerce – likely to necessitate deep cuts to Medicaid and other safety net programmes like Food Stamps.
• The budget also raises the US debt limit by USD$4 trillion, averting the possibility of a debt limit standoff in the summer and increases defence spending by USD$300 billion.
• Passage of the resolution, with the endorsement of Trump, puts the House firmly in the driving seat with the Senate, who passed a narrower border security, defence, and energy budget blueprint last week. The two chambers must now enter into negotiations and adopt an identical budget resolution to open the reconciliation process.