EUROPEAN FIXED UPDATE: Gilts u-turn after the gov’t, EGBs/USTs more contained

Analysis details (10:45)

• Core benchmarks lifted markedly alongside the commencement of Gilt trade following reports and the subsequent confirmation that the UK Gov’t is not moving forward with its plan to abolish the 45p tax threshold.


• An update which sent Gilts to a tick above the 98.00 mark at best and sent the accompanying yield back below 4.00% to a 3.96% low. However, this move has since faded as we await a speech from Chancellor Kwarteng later today for any clues into their fiscal plans after today’s announcement. Additionally, the u-turn on the upper tax rate is perhaps more of a symbolic alteration, given it drew significant public and political pushback, than a key fiscal one, as the expected savings for the gov’t from this abolition represents just GBP 2-3bln of wider tax reductions that are, as things stand, likely to be over GBP 30bln in size and thus there is still a significant amount of financing for the gov’t to find and/or cut. Hints around this are already emerging from the Chancellor, who said that spending will not increase in lockstep with inflation next year. For reference, market pricing for the BoE hasn’t altered much for the November gathering with 125bp of tightening still priced; further out, pricing for December onwards has eased a touch, but remains elevated.


• Amidst this, broader debt peers have been lifted to highs of 138.93 and 112.09 for Bunds and USTs respectively, however much of the initial upside has since dissipated and the benchmarks have been incrementally negative at points throughout the morning. Action that has occurred with broader newsflow somewhat limited, as markets digest numerous weekend updates, final PMIs which were largely in-fitting with the flash readings but dented slightly amid Nord Stream concerns from German respondents, for instance. Looking ahead, Central Bank speakers continue to dominate the schedule with BoE’s Mann due before multiple Fed officials including Williams. Regarding Mann, we look for any hints from the hawkish member as to the potential increment(s) to be discussed in November, given she nodded towards a 75bp move prior to the last gathering.


• Technically, while Bunds are now essentially unchanged they reside some 50 ticks above the earlier trough at 138.05, if the downward pressure picks up once again, support is touted at 137.84 and then 137.62. For USTs, the September 29th low of 111.20+ is the next potential support mark if the current 111.25+ low is reapproached.

03 Oct 2022 - 10:45- Fixed IncomeResearch Sheet- Source: Newsquawk