US: Johnson Scores Major Win w/Budget Vote, Challenging Negotiations Ahead (1/2)

• The DMO announced earlier this morning that it would be looking to hold a tender on Thursday this week for a potential conventional sub-5 year gilt.
• We note that already in this fiscal year the 0.125% Jan-26 gilt (ISIN: GB00BL68HJ26) has been reopened via tender twice for GBP2.0bln in September and November.
• This gilt is still trading at a premium to the rest of the curve (even when taking into account its low coupon) and we think that there is still strong demand for this gilt in the market.
• We think the market agrees with our assessment as the 0.125% Jan-26 gilt is underperforming similar gilts around a similar maturity this morning.
• In terms of the size, there is only GBP2.6bln remaining in the unallocated bucket and we still have a 10-year syndication of GBP8.5bln and linker syndication of GBP4.5bln remaining this year. Given this tender and those two remaining syndications, we think it looks unlikely the linker syndication will be upsized if we see a sizeable tender this week, but still see a change of the 10-year syndication being increased to GBP10.0bln.
• If the DMO wanted to leave the option to upsize the 10-year syndication, the maximum size of the tender would be around GBP1.25bln nominal. With the two tenders being for GBP2.0bln, however, there is the chance of a larger size.
• We therefore pencil in a GBP1.0-2.0bln size for this week's transaction. Note that there is no PAOF applicable to gilt tenders.
• The DMO is open for consultation comments until 15:30GMT today and will make an announcement regarding the timing and size of the tender at 7:30GMT tomorrow.

Corrected to say "underperforming" rather than "outperforming" this morning.

• The DMO announced earlier this morning that it would be looking to hold a tender on Thursday this week for a potential conventional sub-5 year gilt.
• We note that already in this fiscal year the 0.125% Jan-26 gilt (ISIN: GB00BL68HJ26) has been reopened via tender twice for GBP2.0bln in September and November.
• This gilt is still trading at a premium to the rest of the curve (even when taking into account its low coupon) and we think that there is still strong demand for this gilt in the market.
• We think the market agrees with our assessment as the 0.125% Jan-26 gilt is underperforming similar gilts around a similar maturity this morning.
• In terms of the size, there is only GBP2.6bln remaining in the unallocated bucket and we still have a 10-year syndication of GBP8.5bln and linker syndication of GBP4.5bln remaining this year. Given this tender and those two remaining syndications, we think it looks unlikely the linker syndication will be upsized if we see a sizeable tender this week, but still see a change of the 10-year syndication being increased to GBP10.0bln.
• If the DMO wanted to leave the option to upsize the 10-year syndication, the maximum size of the tender would be around GBP1.25bln nominal. With the two tenders being for GBP2.0bln, however, there is the chance of a larger size.
• We therefore pencil in a GBP1.0-2.0bln size for this week's transaction. Note that there is no PAOF applicable to gilt tenders.
• The DMO is open for consultation comments until 15:30GMT today and will make an announcement regarding the timing and size of the tender at 7:30GMT tomorrow.

Both Citi & Goldman Sachs continue to like Euribor June ‘25/December ’25 (ERM5/Z5) flatteners: 

• Citi: The ECB is facing a rapidly changing landscape with the sharp sell-off reversing much of the impact of cuts so far on long-term real yields. The January meeting is unlikely to offer a dovish fightback, however, with the GC instead gearing up for a lively debate over what neutral looks like. A slowing in cuts beyond March cannot be ruled out and is one reason why we still like ERM5/Z5 flatteners
• Goldman Sachs: Given the ECB has been reluctant to provide explicit easing guidance so far, we think communication (this week) is unlikely to point towards a faster (or even consecutive) series of cuts. As a result, we continue to like ERM5/Z5 flatteners as prospects for easing are delayed rather than removed.
• The spread is 1.5 ticks lower on the day at -13.0, driven by the DeepSeek news outlined elsewhere.
• The spread remains in the multi-week range (shown in the chart below).

Fig. 1: Euribor June ‘25/December ’25 Spread (ERM5/Z5)

Source: MNI - Market News/Bloomberg