BONDS: Room For Gilt Underperformance Vs. Bunds Narrows Into UK Budget
Nov-19 10:42
We highlighted the potential for tactical gilt underperformance vs. Bunds when the spread was trading around 175bp but now think that room for an extension of the move is limited ahead of the UK Budget.
- The recent increase in UK fiscal risk premium has driven the gilt/Bund spread out to ~185bp.
- While Chancellor Reeves’ apparent u-turn on income tax rate hikes is gilt-negative, the Budget is still set to deliver fiscal tightening, most likely via increases to a wider list of smaller taxes (albeit with receipts of these taxes much more volatile than income tax) and extension of the freeze of tax thresholds.
- This outcome is generally reflected by current market pricing and we would argue that there is now greater visibility re: the likely fiscal choices than in prior instances of gilt weakness tied to fiscal uncertainty/worry (weakness in UK swap spreads was also less pronounced than prior sell offs surrounding the UK’s fiscal outlook).
- Elsewhere, the potential for an expedited BoE easing cycle could provide tailwinds for gilts, limiting any spread widening episodes (absent meaningful underdelivery/questions surrounding fiscal credibility stemming from the Budget).
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SOFR: Net Long Cover Dominates On Friday
Oct-20 10:42
OI data suggests net long cover dominated in SOFR futures on Friday, with some pockets of net short setting seen in the Greens/Blues. SOFR futures moved away from session highs on a combination of easing US/China trade tensions (following less inflammatory rhetoric from President Trump) and cooling fears around regional bank risks.
- Long cover was seen in the Whites, Reds and Greens.
- The largest daily OI change came in the H6 future (-29k change).
| 17/10/2025 | 16/10/2025 | Daily OI Change | Daily OI Change In Packs | ||
| SFRU5 | 1,415,286 | 1,409,090 | +6,196 | Whites | -18,567 |
| SFRZ5 | 1,473,232 | 1,473,942 | -710 | Reds | -23,437 |
| SFRH6 | 1,101,412 | 1,130,309 | -28,897 | Greens | -8,159 |
| SFRM6 | 1,038,514 | 1,033,670 | +4,844 | Blues | +2,450 |
| SFRU6 | 1,006,656 | 1,009,081 | -2,425 | ||
| SFRZ6 | 1,010,904 | 1,023,925 | -13,021 | ||
| SFRH7 | 817,130 | 820,342 | -3,212 | ||
| SFRM7 | 778,786 | 783,565 | -4,779 | ||
| SFRU7 | 666,693 | 673,869 | -7,176 | ||
| SFRZ7 | 778,606 | 779,490 | -884 | ||
| SFRH8 | 414,585 | 417,352 | -2,767 | ||
| SFRM8 | 376,370 | 373,702 | +2,668 | ||
| SFRU8 | 307,682 | 308,228 | -546 | ||
| SFRZ8 | 326,534 | 328,657 | -2,123 | ||
| SFRH9 | 201,028 | 196,387 | +4,641 | ||
| SFRM9 | 175,721 | 175,243 | +478 |
OPTIONS: Larger FX Option Pipeline
Oct-20 10:41
- EUR/USD: Oct21 $1.1800(E1.0bln); Oct22 $1.1595-00(E1.1bln), $1.1810-30(E1.1bln); Oct23 $1.1575(E1.2bln), $1.1750-65(E2.3bln)
- AUD/USD: Oct23 $0.6585-00(A$1.1bln)
- USD/CAD: Oct22 C$1.3800($1.9bln)
US TSYS: Mild Pullback Doesn’t Alter Bullish TY Outlook
Oct-20 10:40
- Treasuries are mildly lower across the curve, slowly extending Friday’s more pronounced paring of regional bank risk-off that had started on Thursday.
- They marginally outperform EGBs where France leads losses after S&P’s unscheduled downgrade on Friday.
- President Trump over the weekend expressed optimism around US-China trade talks but with clear focus points on rare earths, fentanyl and soybeans before those talks.
- The session is likely to be driven by headlines/flows, with no data scheduled and the Fed in blackout. One area of attention will be Trump comments when meeting with the Australia Prime Minister late this morning.
- Cash yields are 0.2-1.2bp higher across the curve, within Thu-Fri ranges.
- TYZ5 trades at 113-12+ (-02+) off an earlier low of 113-10+, on thin cumulative volumes of 230k.
- The outlook remains bullish. It has pulled away from last week’s high of 114-02 (Oct 14 high) after clearing notable resistance levels, with next key resistance now seen at 114-10 (Apr 7 continuation). Support is seen at 113-00 (20-day EMA).
- No data scheduled and Fed now in media blackout
- Bill issuance: US Tsy $86B 13W & $77B 26W bill auctions (1130ET)
- Politics: Trump in bilateral meeting with Australia PM (1115ET) before bilateral lunch (1145ET)
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