Halister News

(Bloomberg) -- Paying the U.K. front-end outright or cross market looks to be a good medium-term hedge for a potential U.K. exit from the EU, as richening may reverse whatever the outcome of the June 23 referendum, Citigroup analyst Jamie Searle writes in client note yesterday.

• Favor waiting until closer to the vote to fade the move, as further bull-flattening possible between now and then
  • A vote to leave may not prompt a BOE rate cut as GBP is likely to fall fast, boosting inflation quite soon
  • If U.K. votes to stay, front-end may also quickly re- price and re-align more with the U.S. rather than the euro area
• Longs in 5Y breakeven inflation spreads are another attractive hedge, perhaps the closest alternative to selling the pound in the rates space
• BOE rate increase now priced for the same time as initial ECB tightening, which seems wrong given different fundamentals and greater odds of U.K. inflationary presures
• NOTE: TD Securities, ING favor Dec 16/Dec 17 short-sterling steepeners, with TD saying market pricing of a BOE rate increase is too extreme; see more trade ideas here