STIR: SFIZ5/Z6 Spread Affirms View That This CPI Will Not Impact BoE MT

The 10-year Gilt/Bund spread is 1.5bps narrower at ~193.5bps. Initial support is the Sep 24 close around 192bps, clearance of which would bring the spread to its tightest since mid-August and expose the August 1 close at 184.5bps. Aggregate moves have been relatively contained this morning, with the UK and Eurozone data calendar picking up later in the week. 

• There are a few drivers of Gilt outperformance versus Bunds over the past week:
• On the monetary policy/data side, last week’s UK labour market data was soft, while Governor Bailey retained optionality for a Q4 rate cut.
• On the fiscal side, there are some expectations that the UK’s "fiscal black hole" won’t be quite as large as was previously feared, alongside speculation that Chancellor Reeves may increase fiscal headroom above the c. GBP10bln seen in the last two fiscal events.
• Fiscal policy remains a key focus for the Gilt market ahead of the Nov 26th budget. The main fiscal headlines from the weekend have suggested that VAT may be removed from energy bills.
• UK yields are little changed across the curve, while German yields are up to 1.5bps higher with a light bear steepening bias noted.
• In futures, Bunds are -14 ticks at 129.83, while Gilts are +1 at 92.47.
• Slovakia and the EU have sold bonds this morning, while books for Italy’s latest retail offering have opened. Estonia has issued a mandate for a 2034 bond tap.
• This week’s calendar includes UK public sector finance (Tues), CPI (Weds) and flash PMI (Fri) data. In the Eurozone, Friday’s flash PMIs highlight. 

Figure 1: 10-year Gilt/Bund Spread (Source; Bloomberg Finance L.P)

• EUR/USD: $1.1515(E1.0bln), $1.1540-50(E1.2bln), $1.1640-55(E1.3bln), $1.1710-30(E1.4bln),$1.1790-00(E1.0bln)
• USD/JPY: Y150.00-05($2.0bln), Y150.25($600mln), Y154.80($2.0bln)
• EUR/JPY: Y178.00(E530mln)
• AUD/USD: $0.6670(A$589mln)
• USD/CAD: C$1.4000($718mln)