US TSYS: Awaiting CPI Before Potential BoC Spillover and 10Y Supply

ERK5 97.875/97.9375/98.00/98.0625c condor, bought for 1.5 in 4k.

• In terms of the size expectation, we pencil in GBP8.5-10.0bln – smaller than the 10-year syndication held in June.
• The DMO pencilled in GBP8.5bln for the transaction when it updated its remit following the October Budget (prior to that there had only been the one medium-dated syndication planned for this year). Normally if the DMO wants to upsize a syndication it will use some of the unallocated issuance bucket – but given the recent tenders there is less than GBP1.2bln remaining.
• It would be unusual, but we think there is also scope for the DMO to top up the syndication amount with a small portion of the remaining medium-dated auction bucket. There are only two medium-dated auction left this fiscal year: one of the 15-year 4.375% Jan-40 gilt which is due to be opened via reopened for auction for the first time following a syndicated launch in September and syndication tap in January. The other auction is a reopening of the 4.50% Mar-35 gilt due to be launched this week. We currently pencil in auction sizes of GBP3.0bln and GBP4.0bln respectively and note that if half of the PAOF is taken up we would only see GBP7.7bln of the remaining GBP8.7bln in the medium-dated bucket filled. This should give the DMO flexibility to transfer up to around GBP1.0bln from the medium-dated auction bucket to upsize this syndication without altering the auction sizes.
• If the DMO is comfortable to increase the syndication size further and to reduce the size of the 4.50% Mar-35 auction in March to for example GBP3.0bln then in conjunction with a transfer from the unallocated bucket, the GBP11.0bln transaction size seen in June could be repeated. We think overall though that a GBP8.5-10.0bln size seems more likely.
• Bookrunners: Barclays, BNP Paribas, Citi, Goldman Sachs International Bank, HSBC and NatWest.

Continued U.S. tariff worry (albeit not generally focused on the UK) and the latest downbeat assessments of the UK labour market (REC-KPMG report on jobs and comments from Bank of America) provide background support for gilts today.

• Futures +18 at 93.38 (93.13-49).
• The short-term bullish cycle in the contract extended last week, initial support and resistance located at 92.50 & 94.35, respectively.
• Yields flat to 1.5bp lower across the curve, front end outperforms.
• 2s10s and 5s30s ~2.5bp and ~4bp below respective ’25 closing highs.
• BoE-dated OIS shows 61.5bp of cuts through-year end, with only modest (6bp) pricing of a follow up rate cut in March and the next 25bp decrease in Bank Rate fully priced through May. We believe a March cut is unlikely at this stage, but it may be a very close vote (potential for a 5-4 vote split is high).
• SONIA futures flat to +3.5, last week’s highs untested.
• Little of note on the UK calendar today, with comments from BoE Governor Bailey & MPC member Mann (after her dovish pivot) eyed on Tuesday.
• This week’s DMO issuance comes via a syndication of the new 4.50% Mar-35 gilt (we expect this to price tomorrow, pencilling in a size of GBP8.5-10.0bln) and GBP1bln of the 0.625% Mar-45 I/L line (Wednesday).