EUROPEAN FIXED UPDATE: Gilts outperform amid tax rise speculation, USTs await Fed speak

Gilts: +36 ticks, 93.73

• All focus on the Chancellor’s morning speech. Ahead of it, early morning reporting suggested that while she wouldn’t provide any specific policy guidance, her speech would lay the groundwork for manifesto breaching tax increases in the November budget.


• Into this, Gilts opened higher by 34 ticks at 93.71 on the view that morning briefings were focused on an income tax increase; a tax that is generally regarded as deflationary due to the impact on disposable income. A point which, particularly when taken alongside possible growth implications, could see the BoE ease by more than currently priced; an outcome that would have the bonus implication of pressuring yields and reducing the UK’s debt financing burden.


• Thereafter, the speech from Reeves began and was very much focused on the headwinds the economy faced, the expected OBR productivity downgrade and a commitment to the fiscal rules. The latter point, and her pointing out that the more debt the UK sells the more it will cost, lifted Gilts further to a 93.98 peak firmer by 61 ticks at best, pushing the 10yr yield to a 4.379% trough.


• Pertinently, during the speech, she did not reiterate the manifesto pledges around taxation. An omission that has been interpreted as confirming the pre-market briefings regarding the likely manifesto-breaking tax increase(s). Her press conference then began and saw her avoid questions around policy specifics and the manifesto pledges. Overall, the main takeaway is that she has, as expected, laid the foundation for tax increases in the Budget.


• By the time Reeves concluded Gilts had pared essentially all of the upside seen during the speech and now resides back around the 93.71 opening level with gains of 35 ticks. A pullback justified by the above assessment that Reeves added little vs the pre-market briefings, which Gilts reacted to at the open.


• For the BoE, the briefing will have no impact on Thursday’s announcement where a hold is expected but almost certainly subject to a split decision. Market pricing hasn’t changed, it continues to imply c. 9bps of easing at the November BoE and a total of 17bps by end-2025. A cut is not priced until February 2026 and around 65bps is implied by end-2026.


• 2029 Gilt supply was well received with a b/c in excess of 3x and a smaller-than-prior tail. No move to the results.

USTs: +6+ ticks, 112-28

• Firmer, posting gains of a handful of ticks into a session largely devoid of data owing to the shutdown with just RCM/Tipp optimism due. Prior to that, Fed’s Bowman is scheduled though the topic is banking supervision; Bowman hasn’t spoken on policy since mid-October, where she outlined a view for two more cuts before end-2025.


• Upside this morning that was spurred by a deterioration in the risk tone, as sentiment drifted during the early European morning and into the European cash equity open itself. No fresh catalyst at the time behind the pullback, but it continued the subdued APAC tone and Wall St. handover where sectors ex-tech ended in the red.


• At a 112-28+ peak, eclipsing Friday’s high by a tick and notching a new WTD peak. As such, we look to 112-29+ from last Thursday and then a gap before last week’s 113-18 best.

Bunds: +18 ticks, 129.31

• Also firmer with the narrative echoing the above. Bunds hit a 129.35 peak just before the European cash equity open and thereafter moved in tandem with Gilts and pulled back to around the mid-point of the day’s 129.09-35 band.


• More recently, as tone tone deteriorates as discussed in USTs, Bunds have reverted back to and are probing the earlier peak. If this is eclipsed, we look to 129.46 from Friday before resistance from early last week between 129.62, 129.64 and 129.73.


• Updates for Germany specifically are limited, we await Schatz supply shortly; as a reminder, recent taps have been weak, but despite this reaction to the results has been a little muted in recent weeks.


• The OAT-Bund 10yr yield is wider but remains just shy of the 80bps mark into a season where the debate/voting process on the French revenue (PLF) component of the budget begins. On the social security element, which includes wealth taxes, Socialist Party leader Faure has given PM Lecornu additional time for negotiations before deciding to censure or not. As a reminder, speculation that Lecornu would provide additional time was thought to be behind the modest spread narrowing seen on Monday.

04 Nov 2025 - 10:10- Fixed IncomeEU Research- Source: Newsquawk