GILTS: Off Highs, Soft 15-Year Auction Demand Noted
{GB} GILTS: Gilts have ticked away from early session highs, with moves in core global FI peers and disappointing demand at the latest 15-Year auction factoring in.
- Futures pierce yesterday’s high before paring back from best levels, -9 at 93.38 last (93.33-57 range).
- The technical outlook in the contract remains bullish, next upside target is the June 13 high (93.68).
- Meanwhile, support is located at the 20-day EMA (92.51).
- Yields little changed to 2bp lower, curve bull steepens.
- Fundamentals point towards a steepening bias (further BoE cuts, with dovish risks, alongside limited fiscal headroom), although already crowded positioning, as well as a more activist approach from policymakers when it comes to containing spikes higher in long end yields, present risks to this idea.
- 10s spread vs. Bunds little changed at ~192.5bp.
- No headlines of note from the BoE’s CCBS conference as of yet.
- Modest dovish adjustments in GBP STIRs vs. closing levels.
- SONIA futures flat to +1.0, BoE-dated OIS pricing 52bp of cuts through year-end vs. ~51.5bp late yesterday.
- The June high in SFIZ5 remains unchallenged, as does the recent dovish extreme in Dec BoE-dated OIS (~55bp of cuts). However, SFIZ6 has registered a fresh multi-week high, switching bullish focus to the cluster of early May highs.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA Rate (bp) |
Aug-25 | 4.013 | -20.3 |
Sep-25 | 3.952 | -26.5 |
Nov-25 | 3.784 | -43.3 |
Dec-25 | 3.696 | -52.0 |
Feb-26 | 3.572 | -64.4 |
Mar-26 | 3.539 | -67.8 |
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EURNOK: Sell-side Analysts Expect A Reversal To The Upside In Coming Months
EURNOK has fallen over 6% from the April 11 multi-year highs at 12.2223, and a lower close today (currently -0.15%) would be the seventh consecutive losing session. However, some sell-side names think recent krone strength has run its course, and look for EURNOK to reverse higher in the coming months:
- Danske Bank: “We recommend buying EUR/NOK spot @ 11.4820 as a tactical trade with a strategic potential. We set a soft target of 11.8500 and a hard stop-loss of 11.2500”.
- “The gap to our short-term financial model has now been closed, which in isolation suggests that there is no longer a short-term gravitational force pulling the NOK in a stronger direction when evaluated against moves in commodity prices, interest rates and equity sectors/regions”
- “We think a lot of positivism has been priced into markets, which leaves NOK FX vulnerable to setbacks – even more so with technical indicators reaching borderline stretched oversold territory”
- “As we see the balance of risk skewed towards tighter NOK rates spreads, we also expect diminishing support to the NOK from relative rates”.
- Nordea: “We now believe that the downside to EURNOK is somewhat more limited, and we see EURNOK at 11.75 by summer”
- “We expect higher interest rates and lower values of US government bonds. Norwegian life and pension companies have currency-hedged most of their government bond holdings, which involves selling the NOK when bond values fall to maintain their hedging ratios”.
- “Distrust towards the US will lead to more investors moving their savings from the US to other countries…Along with a broad focus on defence across Europe, it could attract much international capital and support the EUR in the coming years…Ramped-up defence spending may also trigger larger capital flows to Sweden, which has a broader defence industry, than to Norway”.
EGBS: Goldman Sachs: Smooth Sailing For Sovereign Credit
Goldman Sachs write “the recovery in risk sentiment coupled with policy puts on both the monetary and fiscal side continue to create a favourable environment for European sovereign credit. Even a risk wobble on tariff and trade risks saw marginal widening in sovereign credit spreads, which outperformed their equity beta”.
- Goldman continue “to estimate that sovereign spreads are slightly tight to fundamentals, but the same dynamics that are likely to keep the EUR front-end steep also imply that growth upside should prevent material widening”.
- They note that “French political risk remains an ongoing uncertainty, although we do not expect this to worsen tangibly on a short-term horizon. Unless we see increasing pressure from opposition parties for fresh elections, sovereign spreads will likely remain tight given the current favourable macro backdrop”.
- Zooming out, Goldman note that “relative to our year-end targets, Bonos are the least stretched and, given the strongest fiscal fundamentals there, we continue to expect vol-adjusted outperformance in Bonos vs BTPs and OATs.
- Overall, they “prefer sovereign credit to gain duration exposure in Europe, given the more symmetric distribution for terminal rate pricing”.
CHINA: /RATINGS: Moody's Affirms China At A1, Outlook Negative
Moody's notes that "the affirmation of the A1 rating takes into account China's large, dynamic economy and capacity for innovation, even as we expect potential growth to slow towards 3.5-4.0% by 2030. Recent trends indicate an improving quality of growth, bolstering economic resilience. The debt burden is likely to increase further, although we expect that it will be partly offset by low interest rates supported by a large domestic savings pool. China's financial system provides large captive demand for government debt, while capital controls contribute to financial stability during periods of stress".
- "The negative outlook is driven by risks that trade tensions between China and its major trading partners could have a long-lasting negative effect on China's credit profile. In particular, shifts in global trade flows and dampened trade growth pose challenges to China's transition to higher productivity-led economic growth and its efforts to contain the rise in its government debt".
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