UK Budget – Backloaded consolidation, event cleared
Last Wednesday, Chancellor Reeves presented her budget after it was leaked by the OBR just minutes before the speech. Rates briefly rallied on the larger-than-expected £22bn headroom, but the move quickly faded once the heavily back-loaded composition became clear. A key point is that fiscal consolidation only begins in a meaningful way in 2028–2029, raising credibility concerns as spending is boosted in the near term. What later supported gilts was the DMO, which indicated that new issuance will be skewed toward the shorter end of the curve. Sterling traded sideways, but the main reaction was in implied volatility, which dropped sharply as the risk event cleared without panic.
US – Macro holds, dovish drift
The recent hawkish repricing of the FOMC was being smoothly absorbed until Fed official Williams suggested rates could fall in the near term, triggering a strong repricing in the front end of the curve. Last week’s retail sales and producer prices prints also came in soft, reinforcing the move. The December meeting is now pricing an 80% probability of a cut. With two weeks to go and labour market data coming only after the next Fed meeting, markets are leaning into the dovish narrative.
Algebris Investments’ Global Credit Team
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