IRAN: "IRAN'S ARMY SAYS IT HAD LAUNCHED ANOTHER WAVE OF DRONE ATTACKS [...]

Core global FI markets draw support from Brent crude oil registering the lowest level seen since early March.

• This comes after lower oil prices and headwinds for tech stocks supported bonds on Tuesday.
• Gilt futures as high as 89.51, piercing initial resistance at the June 18 high (89.49). Projection resistance is located at 89.62, protecting 90.00. Bulls remain in short-term technical control.
• Yields ~1bp lower across the curve, 10s near their April 17 lows (4.725%).
• MP Burnham’s policy preferences remain under scrutiny given the likelihood that he will be the next Prime Minister.
• Chief Secretary to the current PM, Jones, told Sky News that he has had a “reassuring conversation” about Burnhams economic plans and believes he will be the next PM. Jones also believes there’s “room to borrow a little more” to invest in certain projects.
• This comes alongside growing speculation that defence spending will increase, while reports have also suggested that Burnham’s advisors believe that he should scrap the triple lock on pensions.
• Also note that Jim O’Neill, one of Burnham’s economic advisors, has called for billions of pounds more borrowing to pay for investment in infrastructure.
• On the supply front the DMO will sell GBP4.25bln of the 4.125% Mar-31 gilt this morning.
• BoE’s Breeden and Dhingra will speak this afternoon

[Re-posting from yesterday evening]

Special fund takeup (infrastructure / military) meanwhile was a bit subdued in May, falling back to around February / March levels after a higher April. For the military fund, spending consolidates April's tepid pace.

• Specifically, the SVIK (infra) fund took up E3.0bln of credit last month after April's E6.1bln, meaning the YTD pace is quite close to target for the E48.1bln 2026 plan excl. a E10bln transfer to the KTF climate fund.
• The military fund take-up of E1.0bln in May followed a similar E1.2bln in April, with the YTD run rate comparing rather unfavourably with the E25.5bln target for 2026 (but some one-off large scale orders could tilt that later in the year).

Recapping more broadly on German fiscal developments, earlier this month, the finance ministry released a monitoring report of the infrastructure fund (overall supporting our view that an infrastructure programme alone will not be sufficient for the German economy to overcome its structural growth hurdles). Pension reform headlining this week will be a positive for the sustainability of the country's pay-as-you-go system but will put upward pressure on non-wage labour costs medium term. Local media meanwhile quotes sources on an income tax reform draft to be published by July 1, but tampers optimism on the comprehensiveness of the measures included in that.

• Infra fund monitoring analysis here
• Income tax reform report here
• Pension reform highlights here
• German politics wrap here

Special fund takeup (infrastructure / military) meanwhile was mixed in April, spiking to its second highest month on record for the infra fund, but tapering off to a more tepid pace for the military fund after March's high. Overall takeup is now slightly ahead vs the targeted 2026 pace for infrastructure and continues to lag for military.

• Specifically, the SVIK (infra) fund took up E6.1bln of credit last month after March's E3.1bln, meaning the YTD pace is a little above target for the E48.1bln 2026 plan excl. a E10bln transfer to the KTF climate fund.
• The military fund take-up of E1.2bln take-up in April followed a firm E3.2bln in March and compares with the E25.5bln target for 2026.
• Recapping more broadly on German fiscal developments, earlier this month, the finance ministry revised their bi-annual tax estimates - analysis here - while the government also is planning to come up with a reform package including changes to income taxes "before the summer break". Note that the last week the Bundestag is due to sit ahead of the summer break is the W/C 6 July.

[Re-posting from yesterday evening]

German government fiscal data showed a low core budget deficit last month (partially due to a one-off) with the Jan-May YTD data giving little reason to expect an outsized deficit over or undershoot for this year as of now. Core budget fixed investments are down on a Y/Y YTD basis.

• In the core budget, May saw a deficit of just E1.0bln (vs E9.3bln in May 2025 and E4.6bln in May 2024) after an April deficit of E9.1bln. That brings the YTD deficit to E42.0 bln (42.8% of FY26 plan) vs E32.8bln as of May '25. That's similar to Jan-May deficits from 2022 (E52.4bln) and 2023 (E47.8bln) although predictive power is limited at this stage with annual deficits of E116bln and E65bln in those years.
• YTD federal revenues decreased 1.7% to E162.7bln, with E35.3bln in May. Taxes received by the federal government (not equivalent to the taxes raised by the federal as per "shared taxes") are down 3.1% Y/Y YTD in May, albeit continuing the gradual improvements throughout this year after a weak January. For May in isolation, the finance ministry notes EU grant one-offs pushing revenues in addition to "higher receipts from income tax and corporation tax" and "rise in receipts from insurance tax and electricity duty" while "in contrast, receipts from motor vehicle tax and tobacco duty were down". "The temporary cut in the rates of energy duty on fuels in May and June will only be reflected in revenue figures as of July", they add.
• YTD expenditures increased 3.2% Y/Y to E204.7bln with May alone seeing E36.3bln after April's E38.6bln. Key drivers of the YTD pickup continue to be a) loans to the employment agency and healthcare providers and b) consumptive spending, while (core budget) fixed asset investments are down 10.9% Y/Y YTD at E1.7bln.