US TSY FUTURES: Mix Of Long Setting & Short Cover Seen Wednesday

Government funding expires midnight Friday and Congressional leaders are yet to release the text of a Continuing Resolution to extend appropriations until March 14. 

• House Speaker Mike Johnson (R-LA) told reporters yesterday he intends to adhere to an informal House Republican rule allowing lawmakers 72 hours to consider legislation before a vote.
• If final text is released today, a House vote is likely to take place Friday, leaving little time for the Senate to complete work on the funding bill before the deadline, although the chance of a shutdown remains low.
• Reporters say a Republican move to include billions of dollars in direct payments to farmers has drawn a raft of counter-demands from Democrats that Johnson has struggled to get approved by his conference.
• Johnson said late Monday, “I think we’re very close to the drafting process right now,” suggesting there could be further delays as drafting a CR is a lengthy process.
• There are also political considerations for Johnson: He is facing an even more fragile majority in the upcoming Congress, meaning just one or two dissenting votes can sink legislation or his re-election bid on January 3.
• The balance will be passing a CR without further angering conservatives. Too many big-ticket spending items or Democrat policy riders could sow the seeds of another sustained period of tension with his right flank.
• As the package will be passed under suspension of rules, it needs a two-thirds majority on the floor so Johnson must also keep Democrats onside.  

Rallies in gilts remain short-lived and limited, with the impact of this morning’s broad-based upside surprise in UK wage data weighing.

• Futures to fresh session lows of 93.24 in recent trade.
• Round number support now eyed (93.00) after a break of key short-term support (93.40).
• Yields 5-8p higher, 5s under the most pressure.
• 10s above 4.50% for the first time since November 20.
• Next upside target there comes in at the November 14 high, 4.566%.
• 2s10s ~1bp flatter at 7.1bp, within multi-week range.
• 5s30s 3.3bp flatter at 67.3bp, 9bp below last week’s multi-month high.
• Spread to Bunds less than 1bp away from its ’22 mini-Budget closing high (227.5bp), last 227bp, ~8bp wider on the day.
• UK fiscal risks, stickier UK inflation, Eurozone economic growth headwinds and the ECB’s more activist approach to monetary easing (when compared to the BoE) continue to underpin the spread. Feedthrough from the German ’25 issuance plan also factored into today’s widening.
• SONIA futures last flat to -14.5.
• BoE-dated OIS shows 58bp of cuts through ’25 vs. 73bp late yesterday i.e. less than 2.5x 25bp cuts are now priced through next year. Pricing hasn’t been this hawkish since mid-November, with wage data set to cause concern at the Bank.
• UK CPI data due on Wednesday ahead of Thursday’s BoE decision (no change in rates expected, Dhingra likely to be the only dovish dissenter).

Bund futures have moved away from intraday highs as European equities continue to recover, now -3 ticks today at 134.70. Bunds were supported earlier by a pullback in crude oil prices, the details of the German 2025 funding plan and the weaker-than-expected December IFO survey.

• German 2025 capital markets issuance will be E254bln (E272.5bln in 2024), in the bottom half of expectations we had seen. The most notable part of the plan is that there are increases in Bobl and 30-year Bund issuance.
• The German 10s30s curve steepened following the announcement to ~23.5bps, but has since fallen back to 23bps.
• The German IFO business climate and current assessment metrics were weaker-than-expected, while the current assessment was a little stronger.
• 10-year peripheral spreads to Bunds are 1-1.5bps wider this morning, despite the latest recovery in European equities.
• Broader macro focus turns to US retail sales and industrial production data this afternoon.