U.K. Real Yields Leading Rates Rally on BOE Dovish Hike Spin
(Bloomberg) -- With GBP real yields in the belly of curve leading the post-BOE rates rally, the bull steepening of that curve driven by the five-year bucket may extend, partially unwinding moves seen after the MPC decision in September.
- The yield on the U.K. 5Y inflation-indexed gilt falls -11bp to -228bps vs record low of -288bp in April
- Typically, real rates lead rates selloffs on more hawkish than expected outcomes as seen after the September meeting, which saw a cheapening of inflation swaps that is now being partially unwound as MPC validates pre-BOE pricing of three 25bps increases in total by 2020
- GBP 3-year forward 1-year Sonia rate -- a proxy for the BOE’s terminal rate -- is hovering around around 1% with the central bank omitting the language from previous statements saying that more hikes could be needed than the market expects
- NOTE: Dec17-Dec18 MPC-dated OIS flattened to 27bp from ~36bp and may have further to go given the risk of a 1H 2018 hike has significantly decreased and a fully priced hike by November 2018 is now exposed from a risk-reward perspective; see more here
- NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma
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