EUROPEAN FIXED UPDATE: Gilts tarnished by reports of a fiscal U-turn, USTs await details on the data docket

Gilts: -77 ticks, 92.60

• A tumultuous session, already, for Gilts. The benchmark opened lower by 97 ticks, falling from 93.37 to 92.40 before moving to a 92.07 trough posting downside of 130 ticks at most. Lifting the 10yr yield to 4.57% and the 30yr to 5.37%


• Hit by a report in the FT overnight that Chancellor Reeves is set to U-turn on the extensively briefed manifesto breaching lift to the Income Tax rate. Reporting suggests that change in tack is due to concerns about backlash from MPs and voters to a headline increase. Instead, the Chancellor is cutting the internal thresholds alongside numerous smaller tax hikes. A change that muddies the water on just how much Reeves will be able to reliably generate vs the relatively predictable funds an Income Tax hike would generate.


• Given this, markets now have to contend with another knock to Reeves' fiscal credibility via the latest U-turn, work out if the smaller adjustments will be sufficient to fill the fiscal hole and provide Reeves with sufficient breathing room. The U-turn also adds to the political pressure that PM Starmer, and by extension, Chancellor Reeves has been facing in recent sessions.


• However, this narrative has itself been subject to a U-turn. Bloomberg’s Wickham scooped that the Income Tax rate increase was being dropped due to improved UK forecasts. A report that lifted Gilts by nearly 50 ticks to 92.85.


• Since, ITV’s Peston has scooped the current “masterplan”, which is to extend the Income Tax threshold increase by another two years and look at reducing the threshold where the 40p and 45p tax bands kick in. Adding colour on the above report that the improved forecast specifically concerned current/expected future wage growth, which has increased projected tax revenue forecasts.


• As it stands, Gilts are in the red by c. 70 ticks having pared around half of the 130 ticks of damage seen at worst vs yesterday’s close. The morning’s reporting remains very fluid but, as it stands, the market has taken some (relative) comfort from the latest forecast-related updates. However, it does beg the question of why this was not briefed to journalists before the open, in order to attempt to prevent some of the upside in yields and further knock to the credibility of Reeves and Starmer as we count down to the budget.


• One side note to this is the implications for the BoE, as the movement in yields has trimmed the odds of a cut in December to below 75% from the c. 85% seen earlier in the week post-data. Particularly if the improved forecasts are due to expectations of elevated wage growth; a point of note given the divide on the MPC being holding/cutting, Bailey’s focus on inflation and the tie-breaking he may play once again in December.

USTs: -2+ ticks, 112-22

• A softer start for USTs, down to a 112-19 low in the early European morning as US futures found a bit of a floor, the latest chip updates potentially helping US sentiment.


• Newsflow for the US has been a little light this morning, focus on the government bureaus as they get back up and running, meaning that new data schedules are likely to be published shortly and potentially as soon as today. Schedules that could see next week peppered with catch-up releases.


• Into all that, the December Fed remains a divided one. Markets ascribed a near 50/50 chance of a cut, and as such the belated prints will draw significant attention.

Bunds: -23 ticks, 128.69

• Also in the red, somewhere between USTs and Gilts in terms of price action.


• Down to a 128.63 low with losses of 29 ticks at most.


• The main update for Germany has been on the fiscal front. Overnight, the German defence ministry announced the 2026 plan for the Bundeswehr special fund. Thereafter, the Bundestag's fiscal committee signed off on the total spending plan which is c. EUR 4bln more than the original figure.


• Within that, various sources suggest that net new borrowing for 2026 will be EUR 98bln (vs 89.8bln in the draft). Reports that explain the underperformance of Bunds vs USTs thus far. We now await the full Bundestag vote on November 28th.

14 Nov 2025 - 10:25- Fixed IncomeEU Research- Source: Newsquawk