FED: "Waller Emerges as Favorite For Fed Chair Among Trump Team" - Bloomberg

• +15,000 TYU5 113 calls, 13
• 1,500 TYQ5 109/109.5/110.5 broken put flys, 17 ref 110-23.5
• 4,300 Wed wkly TY 111/111.25 call spds (exp Wed) vs. wk2 TY 111.25 calls (expire Fri)

• CANADA JUN IVEY PURCHASING MANAGERS INDEX 53.3 SA

Last week’s poignant reminder of the UK’s fiscal fragility halted the narrowing move in the 10-Year gilt/Bund spread, leaving the April closing low (186.8bp) intact, with the spread moving back towards 200bp in the time since.

• Tightening on the back DMO & BoE action to shorten the WAM of gilts offered to market, coupled with BoE Governor Bailey noting that the recent curve steepening will factor into the Bank’s September decision on QT, threatened a break below the Apil closing lows in the spread.
• This was before the UK government was forced to water down its welfare reform package, with the subsequent sell off in gilts (also partly attributable to short-lived questions over the future of Chancellor Reeves) underscoring the idea that the UK may struggle to pass meaningful spending reforms moving forwards.
• This increased the odds of tax hikes as soon as the Autumn and highlighted the fragile fiscal situation evident in the UK at present.
• Meanwhile, on the German side, while the country’s newfound desire for fiscal loosening is a definite step change, the potential lack of viable investment vehicles has many suggesting that the full envelope of tabled fiscal spending will not be utilised.
• Still, we stress that the upside risk to German issuance over the medium-term is set to present cheapening pressure for Bunds vs. swaps.
• The fiscal evolution within both the UK and Germany is likely to drive the medium-term direction of the spread, with relative monetary policy stances and the higher beta of gilts to U.S. Tsys providing supplementary factors to consider.
• The chart below highlights the major support and resistance levels in the spread, which trades around 5bp below the middle of its year-to-date range.

Fig. 1: UK/Germany 10-Year Yield Spread (bp)

Source: MNI - Market News/Bloomberg Finance L.P.