US TSYS/SUPPLY: Upcoming Auction Sizes Unchanged, TGA To Peak >$1T

Most of the latest sell-side notes that we have read point to likely support for front end to belly ASWs on the back of signposting of a Leverage Ratio tweak at the end of tomorrow BoE FPC meeting.

• Bank of America: Government changes may mean fiscal uncertainty is high, but our reworked arithmetic suggests the conflict hit has moderated. BoE's Bailey has addressed QT head-on. A pace slowdown (to keep active sales unchanged) seems likely to become consensus. Tuesday's FPC record release should point to banking sector reforms that are helpful for Gilts. Although we are unlikely to see anything concrete, if the mood music does confirm that Leverage Ratio modifications are on the way that will make it less likely to be a binding constraint, then this should favour Gilts on asset swap. We recommend buying UKT 0.875% 2033 on asset swap.
• Goldman Sachs: We think the steepening of the UK curve is likely to continue. Governor Bailey’s remarks in Sintra revealed the BoE is still focused on labour-market softening and weak growth, which, together with oil relief, should keep front-end yields trending lower as residual inflationary risks subside. The ongoing focus from Bailey on the pre-war cut pricing suggests the possibility of an eventual return to easing, potentially in 2027, that should continue to see the front-end outperform. At the same time, the curve steepened with longer-dated UK yields rising. We think this is consistent with limited further room for risk premium compression until the market has a clearer view on upcoming policy changes under a potential Burnham government, especially as the tension between spending ambitions, tight headroom and limited tax options remains unresolved. The Financial Stability Report (7 July) could provide a modest tailwind to Gilts on asset swaps via tweaks to the leverage ratio. As a result, we continue to prefer GBP steepeners, with front-end macro relief doing the work to pull yields lower while ongoing fiscal uncertainties limit the scope for further UK term-premium compression.
• Morgan Stanley: We enter SFIM7/M8 steepeners to fade the remaining tightening premium and position for further curve normalization. We see hikes as very unlikely, with risks skewed toward a more dovish BoE shift. Next week, focus turns to the FSR and the leverage-ratio potential review. We expect a supportive outcome for front-end ASWs and keep our 5s10s ASW box flattener into the event.
• Societe Generale: Given political uncertainty, we prefer to take profit on the trade idea we suggested at the end of May: Long 2y SONIA vs SOFR swap. Since then, the spread has tightened from 30bps to -3bps, overshooting our initial target of 15bp. We consider re-entering the trade once there is more clarity on the PM transition.

• -4,000 SFRU6 96.14, post time bid at 0858:07ET, trade .14 last (-0.005)

House Speaker Mike Johnson (R-LA) told Fox News he will attempt to pass President Donald Trump’s priority electoral reform bill, the SAVE America Act, “one more time” through budget reconciliation, despite doubts in the Senate that a third party-line bill is possible before the midterm elections. Note: There are only 18 full legislative days scheduled before the November 3 midterms.  

• Johnson downplayed a rebellion, led by Rep. Anna Paulina Luna (R-FL), which is threatening to derail a raft of key legislation: “Nobody’s mad at Anna, we all want the same thing…"
• Trump said during a Friday speech, “We can only lose the midterms if we allow ourselves to lose the midterms... But if we terminate the filibuster as we should do, and immediately vote for the Save America Act, then we will not lose an election for 100 years.”
• Punchbowl News reports, “The House Republican leadership plans to include in reconciliation a $4 billion pot of incentives for states that require voter ID and check the citizenship status of every voter. This provision may or may not pass muster with the Senate parliamentarian. Furthermore, Trump has said he doesn’t want a watered-down SAVE America Act, and that’s what this move would represent.”
• Politico reports that Johnson maintained that Trump would accept the House version of the SAVE America Act — which doesn’t include Trump’s desired prohibition of most mail-in voting, among other provisions — saying that the president understands those measures are “a bigger reach.”