Energy concerns eased somewhat, but long-end rates reacted more strongly to the Bank of England's decision to halt long-end gilt sales. In Europe, eyes also remain on France as the 2027 budget takes shape along with upcoming rating reviews.
Bank of England getting creative with the very long end
The Bank of England surprised us with a big revamp of their quantitative tightening (QT) framework, helping 30Y gilt yields to go down 12bp on the day. Headlines first focused on the Bank’s ambition to bring the entire bond portfolio down to zero over the coming years, which would add significant supply for the market to absorb. But the changes to the framework are more nuanced. For one, around £120bn gilts with the longest maturities will remain on the central bank’s balance sheet, which means bonds maturing after 2049 will not be part of the active sales.
But perhaps a stronger signal to markets was the decision to pause active sales until April 2027 and explore a mechanism to transfer gilts from the Bank of England to the UK government treasury. Government-funded QT does not impact the total supply for the market to absorb, since any purchases would have to be financed by new issuance. But it can help transform the maturity profile, and this is why 30Y gilts are taking a liking to the announcement. Longer-dated gilts will de facto be replaced by shorter gilt issuance.
Friday’s events and market view
We will get the eurozone current account for July and the European Central Bank will release results of its inflation survey, where longer-run consumer expectations are expected to have nudged up on the back of energy prices. ECB President Lagarde will join the press conference following the ECOFIN meetings.
The US will release industrial production data for August. Fed officials scheduled to speak are Bowman and Schmid.
Some more attention will fall on France in the evening as DBRS (AA/Stable) and Scope (AA+/Negative) have scheduled potential rating reviews. Both ratings are higher compared to the three larger agencies (A+/Aa3/A+), but without a final budget yet, it might be premature to make any changes just now, especially more than just an outlook change. That said, PM Lecornu presented plans on Thursday to contain spending and keep the 2027 deficit at 5%. At 96bp, the 10y OAT/Bund spread remains at its highest levels since 2012, reflecting unease ahead of next year's presidential elections.
Other scheduled rating reviews from the three major agencies are for Ireland (S&P AA+/Stable), Germany (Moody’s Aaa/Stable) and Greece (Moody’s Baa/Stable).
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