US: MNI POLITICAL RISK - Trump's SOTU Offers Little New Policy

Sell-side calls that we have seen generally continue to look for gilt outperformance in cross-market terms, with focus on ongoing reduction in UK-specific risk premia. Meanwhile, some desks have started to look into ways to fade the recent hawkish repricing in GBP STIRS:

• Goldman Sachs: “UK yields last week rose slightly alongside JGBs and USTs. Part of this can be explained by the spillovers from JGBs, which has largely been consistent with the historical beta. Additionally, ongoing focus on political headlines saw Gilt yields rise against the flow of incoming data, which remains disinflationary. With geopolitical risks settling, we expect focus to return to the underlying data, with both labour market and inflation data supporting a compression of Gilt risk premia. We expect UK yields to decline further with 10-Year Gilt-Bund and Gilt-UST spreads compressing. We also continue to expect further widening in OIS vs Gilts, although risk reward in the short run is becoming more balanced as the market moves to price in the effect of reduced supply in Q1.”
• J.P.Morgan recommend tactical 2s10s gilt flatteners, given level within recent range and relative steepness vs. fundamental drivers, playing down the political noise from last week. Further forwards they write “keep received Mar26 MPC OIS. 1Yx1Y SONIA has sold off and looks modestly cheap vs. our baseline scenario but we don’t find valuations cheap enough to tactically receive. We have a front/reds SONIA curve flattening bias given RV considerations.”

RXH6 127.00/126.50 put spread 15K blocked 9.5, looks like a buyer of the put spread.

Treasury options saw better put flow on net, SOFR options mixed, two-way, overall lighter volumes to kick off the new week, FOMC on Wednesday. Underlying futures firmer, off late overnight highs, curves bull flatten (2s10s -1.001 at 61.909). Projected rate cut pricing largely steady vs. late Friday levels (*): Jan'26 at -0.7bp, Mar'26 at -4.2bp, Apr'26 at -7.7bp (-8.2bp), Jun'26 at -19.0bp (-18.7bp), first full cut priced in at Jul'26: -26.7bp (-25.2bp).

• SOFR Options:
  • 2,000 0QJ6/0QM6 97.00 call spds
  • +4,000 SFRG6 96.43/96.50/96.56 call flys, .25
  • +2,000 SFRU6 96.18/96.31/96.43 put trees, 2.75
  • +3,000 SFRM6 96.37 puts, 1.75
  • -3,200 SFRJ6 96.56 calls, 6.25
  • +4,000 0QU6 97.25/97.75/98.25 call flys, 3.0 vs 96.675/0.08%
  • +3,000 SFRZ6 96.00/96.25/96.50 put flys, 4.75
• Treasury Options:
  • 5,250 FVJ6 109 calls, 23 ref 108-24.75
  • over 5,100 TYH6 112 calls, 24 last
  • +1,500 TYH6 110.75/111.25 put spds, 7 vs. 111-27/0.10%
  • +2,000 wk5 TY 111.25 puts, 3 vs. 111-29/0.08%
  • +2,500 USK6 112 puts, 59
  • 1,600 TYH6 110.75/111.25 put spds ref 111-28
  • -3,000 TYH6 109/112 put spds, 33 vs. 111-27.5/0.51%
  • +4,000 TYK6 112.5 calls, 14 vs. 111-26.5/0.27%