Halister News

(Bloomberg) -- Term structure of 10y-tenor GBP swaption volatility unwinds recent inversion as gilts stabilize following inflation risk premium induced sell-off, Bloomberg strategist Tanvir Sandhu writes.

• GBP 1y-3m 10y vol spread at 1.6bp/annual vs -1.1bp/annual earlier; post Brexit low of ~-7bp/annual; 1y-2m still remains inverted at -2.7bp/annual; see chart here
• GBP gamma has underperformed today with 3m2y -0.23bp/day at 2.47bp/day and 3m10y -0.21bp/day at 4.58bp/day
• Follows earlier strong demand at 10Y auction and supportive BOE buyback results
• GBP OIS forwards currently pricing 26% probability of a 10bp BOE rate cut by Dec. vs 17% 3 days earlier, assuming 3.9bps Sonia-base rate corridor; small chance of a rate increase toward the end of next year now priced out
• NOTE: Rally in GBP RPI swaps on increased risks of currency pass-through to realized inflation may have over-extended further out the curve, given likely diminished impact on the long-end, 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.