GILTS: Downside put spread in Gilt

Goldman Sachs note that “following the vote of no confidence and the subsequent resignation of PM Barnier, OATs have largely returned to their early November levels.”

• They outline 3 main drivers for this:
• “Markets and consensus likely expected a smaller deficit consolidation than implied by the stated government objective of 5%.”
• “With a very strong backdrop for sovereign credit more broadly, OATs have still underperformed Southern European peers.”
• “The uncertainty generated by the fall of the Barnier government may be more manageable for markets than that in the wake of the parliamentary elections, amid a narrow range of possible policy outcomes.”
• They note that “with catalysts for a widening behind us, we have closed our OAT/Bund widening recommendation.”
• Further out, they see “limited upside for OATs from current levels. As we head into 2025, we expect the issuance backdrop to be challenging. We note that French sovereign debt strongly relies on foreign demand which could waver if political uncertainty remains elevated. As a result, we continue to expect the OAT/Bund spread to be volatile and forecast no additional compression through 2025.”

Of note:

EURUSD 1.04bn at 1.0600.

EURUSD 1.27bn at 1.0600 (tue).

AUDUSD 1.14bn at 0.6500 (tue).

USDCNY 1.01bn at 7.3000 (tue).

EURUSD 1.15bn at 1.0600 (thu).

USDCAD ~1bn at 1.4100 (thu).

EURUSD 2.29bn at 1.0600 (fri).

• EURUSD: 1.0500 (406mln), 1.0525 (269mln), 1.0540 (375mln), 1.0590 (348mln), 1.0600 (1.04bn), 1.0625 (806mln), 1.0635 (538mln).
• USDJPY: 149.85 (391mln).
• AUDUSD: 0.6425 (235mln), 0.6440 (305mln).

Gilts initially rally in sympathy with price action in wider core global FI markets since Friday’s close, before the headlines surrounding a dovish tweak in the Chinese monetary policy stance were accounted for.

• That leaves gilt futures around late Friday levels last +16 at 95.82.
• Initial support and resistance at 95.49/96.18.
• A bullish corrective cycle in the contract remains in play and recent gains reinforce the short-term condition
• Yields little changed across the curve.
• Gilts 1bp tighter vs. Bunds, last 215.5bp, with the 220bp level continuing to cap, while relative fundamentals limit pullbacks.
• SONIA futures off highs alongside gilts, last flat to +3.0, in line with/a little below pre-gilt open levels.
• BoE-dated OIS still pricing ~80.5bp of cuts through December ’25.
• Comments from BoE’s Ramsden due at 13:00 London (more on that later).