EUROPEAN FIXED UPDATE: Gilts hit by the latest assessment of Reeves' fiscal situation, USTs await supply & Fed speak

USTs: -9 ticks, 112-00

• US docket is weighted towards the end of the day with supply, earnings and Fed speak from Collins, Cook and Daly. Into this, USTs are softer given the modestly constructive risk tone and as the benchmark continues to ease from post-NFP highs; though, once again, magnitudes are modest with USTs in a thin six+ tick range.


• The supply schedule has USD 42bln of 10yr Notes for sale, an outing that follows a weak 3yr tap on Tuesday though there was no significant move to the sale.


• Fed officials in focus though we are more attentive to any further clues on the Fed Chair nominee after President Trump said on Tuesday that it is down to the two Kevin’s (Hassett & Warsh) and two others. Nothing official scheduled on this today, with Trump guiding us to an update this week; however, POTUS is due to make an announcement at 21:30BST.


• On the above announcement, while a Fed update is possible, press focus has been primarily on fresh sanctions against Russia.


• As mentioned, USTs are at the lower end of a slim range. If the downside picks up and the current 112-00+ base is breached, then support resides at the 111-31+ Monday WTD low, below this a bit of a gap before the figure and then lows from the last few weeks below 111-00.

Bunds: -21 ticks, 130.14

• A similar start to Tuesday’s session but with magnitudes much more contained. Bunds spent the overnight session contained before picking up to a 130.41 peak early doors with gains of six ticks at best.


• Thereafter, the benchmark began to gradually fade in limited newsflow but experienced a pickup in bearish pressure on a Bloomberg report that Germany is preparing a EUR 100bln fund for investment in strategic assets.


• Since, newsflow has been light aside from Retail Sales for the bloc which printed mixed vs consensus while the priors were revised higher, but spurred no move. Leaving Bunds towards the trough of a 130.11-41 band, essentially matching yesterday’s 130.10 base with Monday’s WTD 129.50 low some way off.


• Ahead, we await results of Germany’s dual-tranche outing before attention turns to the discussed US docket.

Gilts: -34 ticks, 92.41

• NIESR’s latest forecast on the UK economy estimates a current fiscal deficit of GBP 41.2bln in the 2029-30 period (the reference for OBR forecasts). A forecast that incorporates two 25bps BoE cuts in 2025 and one in 2026; market pricing currently implies 85bps of easing by end-2026.


• UK press is heavily focussed on this report, largely running with headlines that Reeves will need to find just over GBP 51bln in the Autumn Budget; a figure formed of the above deficit, and an assumed desire to restore headroom to around the GBP 9.9bln figure


• NIESR believes that any move to amend borrowing rules could risk a “Liz Truss moment”, as such, tax increases appear to be the most likely solution. Tax rises required to hit the c. GBP 50bln figure would be equivalent to a 5p increase to basic and higher income tax rates; an increase that would undoubtedly be politically very difficult for Reeves.


• As such, speculation is ramping up once again around a wealth tax of some form, as a way of avoiding targeting the working class or having to cut spending commitments


• In terms of the timing of any measure(s), NISER’s Millard described the situation as urgent, “you would need to raise taxes a chunk now, as a way of signalling that you would raise a little bit more in future”, otherwise pledges of action face credibility issues.


• Given all of the above, Gilts underperform this morning. Gapped lower by 33 ticks before extending another six to a 92.36 trough. A move that took the benchmark to within reach of Monday’s 92.24 WTD base; below that, support features at 91.96, 91.70 and 91.44 from the week before.


• While they are still the clear underperformer, Gilts have managed to lift off the above low and are holding around opening levels into a quiet afternoon before focus turns to earnings, speakers and supply from the US. A slight recovery that was aided by a woeful Construction PMI figure for the UK, hit by a “fresh and sharp drop in residential building, as well as an accelerated fall in work carried out on civil engineering projects.”

06 Aug 2025 - 10:15- ForexEU Research- Source: Newsquawk