[MARKET ANALYSIS] Fixed waits to see if the TACO narrative holds, Gilts lead after PSNB

• A relatively contained start for fixed income after a tumultuous first few sessions of the week.
• As it stands, the complex is awaiting geopolitical updates from the numerous meetings and briefings scheduled for today, the first of which is due now at the Peace Board signing with President Trump. From these, we look for clarity that the TACO narrative around Greenland is correct, and if the reporting around a deal like the one the UK has with Cyprus is correct.
• For fixed, this leaves USTs and Bunds firmer with gains of three and 13 ticks respectively. Just eclipsing Wednesday's 111-22 best for USTs, while Bunds have a little way to go to first recoup the 128.00 figure and then get to Wednesday's 128.25 high.
• Gilts outperform, on the back of a smaller-than-expected level of UK borrowing in December. The latest PSNB figure of GBP 11.6bln was around GBP 2.5bln below consensus; however, the elevated level and the series being the 10th highest December figure on record, while the FY to December 2025 metric was the 3rd highest on record. Despite the elevated level and still precarious state of UK finances, the December print has been enough to lift Gilts by 39 ticks at best to a 92.12 peak, eclipsing Wednesday's 92.04 best but still shy of the 92.51 WTD peak from Monday.

The fixed income market is seeing a contained start as traders await geopolitical clarity while noting Gilts outperform on lower-than-expected UK borrowing figures from the PSNB report. This situation implies a nuanced outlook for UK fiscal health amid geopolitical developments; while Gilts are rallying due to better-than-expected PSNB results, overall elevated levels of borrowing signal ongoing fiscal challenges. Investors should monitor the reaction to geopolitical meetings, as any developments could further impact market sentiment and yields.