GILTS: Tepid Recovery Fading
Gilts have recovered from session lows, alongside a move away from highs in benchmark global equity futures and with U.S. Tsys trading firmer.
- Still, recoveries are fairly tepid at this stage and have already started to fade as Tsys soften from highs, with bears remaining in technical control.
- Futures last 91.20 vs. lows of 91.11, Fibonacci support located at 90.97.
- Yields 1.0-2.5bp higher, curve steeper.
- UK 2s10s and 5s30s curves continue to operate around the steeper end of their recent ranges, while 50-Year yields moved to fresh cycle highs of 4.888 today.
- Little in the way of UK cues to note, today.
- Further forwards, the market remains comfortable discounting roughly one 25bp BoE rate cut per quarter through year-end, with Governor Bailey’s dovish commentary surrounding the labour market helping limit hawkish adjustments in the wake of the CPI and labour market readings that followed.
- We maintain our base case for a BoE cut in August despite the data, while continuing to lean towards quarterly cuts through year-end, tethered to MPR update meetings.
- Several sell-side names removed calls for a September cut from their forecast profiles in light of this week’s data, but both market pricing and the sell-side continue to lean heavily towards easing in August.
- Flash PMIs, public finances and retail sales data are due next week, while BoE Governor Bailey will testify on financial stability matters.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA Rate (bp) |
Aug-25 | 4.002 | -21.5 |
Sep-25 | 3.965 | -25.2 |
Nov-25 | 3.811 | -40.6 |
Dec-25 | 3.748 | -46.9 |
Feb-26 | 3.633 | -58.4 |
Mar-26 | 3.603 | -61.4 |
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SOFR: SFRH6/Z6 Lifted
Flow in SFRH6/Z6 goes against the recent theme of flattening, although it could represent some profit taking with paper paying -42.5 on ~9K.
- The spread registered all-time lows at -43.5 today.
- The spread has sold off from the -10.0 that printed in mid-April, with some attributing the latest leg of the move to speculation that Fed Chair Powell’s successor (Powell’s term is set to conclude in May ’26) will take a more activist approach to rate cuts, in line with President Trump’s preferences.
- SFRH6/M6 & SFRH6/U6 flattener flow has stood out in recent sessions.
EURIBOR: EUR Rates are heloing Govies higher
- There's continued buying along the Euribor strip, mentioned earlier some were targeted in the ERZ5, now ERU5 (12k), ERZ5 (5k), ERH6 (5k) all in Good size, to bring that part of the strip back in the Green.
- While the curves have generally been flatter, the short end is leading some of the latest bid.
- The German Bund is only testing Yesterday's high at 131.14, but initial resistance is a little further out, up to 131.47.
US OUTLOOK/OPINION: GDPNow Dragged Down By Residential Construction
As MNI noted this morning following the New Residential Construction report (and yesterday's NAHB homebuilders sentiment), residential construction looks like it is going to be an increasing drag on economic growth. The latest Atlanta Fed GDPNow estimate for Q2 GDP growth has been lowered to the weakest since May 27, at 3.4% Q/Q SAAR (3.5% prior), because residential investment is now seen contracting by 4.4% Q/Q annualized in the quarter - vs a -2.8% estimate yesterday and -0.6% in Q1.
- That would be the weakest residential investment growth since Q4 2022 and implies a 0.2pp drag on quarterly growth.
- Overall, the Atlanta Fed's GDP estimate has fallen fairly steadily since peaking at 4.6-4.7% at the start of June. See details below.
