STIR: Repo Reference Rates

With the measures included in the budget accidentally published early by the OBR, there will be little market interest in Chancellor of the Exchequer Rachel Reeves' budget statement, currently being delivered in the House of Commons. From a political risk perspective, the focus will turn to how Reeves frames the decisions made and how effectively the Chancellor explains the factors behind the OBR's forecasts on growth, productivity, investment, and spending. 

• The OBR forecasts have the government's overall spending on welfare at GBP16bln/year higher than its previous forecast in March. This significant increase (coming following the reversal of the Personal Independence Payment cuts and the two-child benefit cap), combined with the tax hikes contained in the budget, could set the dividing line for the next election.
• Labour will argue the hikes are needed to fund stronger public services and support vulnerable people. The Conservatives and Reform UK counter that Labour stands for tax-and-spend economics and is punishing workers to fund those on benefits.
• Ben Riley-Smith at The Telegraph posts on X: "Labour promised £8.5bn of tax rises in their manifesto at the 2024 general election and no massive hike. Scroll on 16 months and taxes have been increased £66bn across Rachel Reeves's two Budgets. That is more than seven times what Labour told the electorate they would do last year. Did they mislead the public on their tax intentions? That question and row is at the heart of the Labour Government's current unpopularity."

• With CGNCRex GBP6.5bln higher than in the Spring Statement, we know the change to the gross financing requirement and therefore a lot of the uncertainty around the gilt remit update has been removed.
• If this was all added to gilts, the remit would increase to GBP305.6bln.
• Even in this scenario and if the NS&I funding target was reduced to GBP10bln from GBP12bln that would only increase the remit to GBP307.6bln - close to the pre-Budget expectation.
• The main downside scenario seems to be if all of the GBP6.5bln was allocated to UKTBs rather than gilts - which could lead the overall remit unchanged.
• To increase the remit above GBP307.6bln it would likely also need a reduction in UKTB net supply.
• The focus therefore will be on maturity buckets. We still think there's a good chance of the long-dated syndication being cancelled. And given the funding so far we probably need some auctions to be cancelled.

GBP STIRs have steadied alongside a recovery from session lows in the long end.

• The short end has mimicked swings seen further out the curve since the early release of the OBR documentation that was supposed to follow the Budget.
• BoE-dated OIS pricing 21.5bp of easing for next month after briefly moving near 22.5bp in initial reaction to the OBR forecasts. Nothing released so far presents an obvious limitation to the Bank cutting rates in December.
• A full 25bp cut is still more than fully discounted through the January meeting, with a follow up rate cut now more or less fully priced through the end of the April meeting (~47bp was priced through April early this morning).
• SONIA futures flat to +3.0, implied terminal rate pricing 3.32% vs. closer to 3.35% early today and dovish session extremes of 3.285%, which matched the year-to-date dovish extreme.