NORGES BANK: Rate Path Leans Against Q1 Move, Smaller than Expected Changes

Citi have recommended entering a SFIH6/Z6 flattener at -17.0bp, targeting a move to -50.0, with a stop set at 0bp.

• They view the BoE easing cycle as “likely having 3 phases. The first was the regular quarterly rhythm for the first 5 cuts. The second - which is the current - is a risk management phase of slower, irregular cuts awaiting more evidence that disinflation is on track. The third, we suspect, will be cuts to a lower terminal rate than priced, informed by lacklustre growth (impeded by a long list of small tax hikes and ongoing political/fiscal uncertainty), with mounting evidence of growing slack in the labour market, and with CPI realizing close to target later in 2026”.
• They believe that the second/current phase is “fairly priced”, and the “potential third phase that offers the best risk-reward”.

Fig. 1: SONIA Mar '26/Dec '26 Spread (SFIH6/Z6 Spread)

Source: MNI - Market News/Bloomberg Finance L.P.

SFIZ5 96.25/96.30/96.35/96.40c condor, bought for 2.5 in 4.5k.

The 10-year OAT/Bund spread is back at 75bps, 1bp wider on the day alongside EGB peers. While continued weakness in equity benchmarks looks to be the main driver of recent EGB spread widening, domestic political developments remain a risk to monitor.

• This morning, Le Parisien reported that members of the centre and right “agreed” that they would note vote in favour of the revenue section of the 2026 budget, if it were to be put to a vote in its current form. Link here
• Sources suggest this would be “due to the insincerity of some of the measures adopted”.
• However, the report does not contain information on whether ministers would abstain from a vote, or vote against the motion.
• Ultimately, it underscores the difficult balancing act PM Lecornu is facing. Amendments to the budget to date have already pushed the expected 2026 deficit towards (or above) 5%, versus a target of 4.7%.
• Meanwhile, the Senate starts reviewing the Social Security section of the budget tomorrow. Actions around the 2023 pension reform suspension are in focus.