Global Rates Strategy Switching to 2s10s steepeners in gilts from 5s10s [ERRATUM]

Research evidence excerpt

Global Rates Strategy Switching to 2s10s steepeners in gilts from 5s10s [ERRATUM]

more

about higher uncertainty around the monetary policy response to a global supply shock

rather than solidified expectations of hikes. We still think it is mostly risk premia that has

been priced into the gilts curve. Risk premia could stay sticky for some time even though

geopolitical tensions have eased recently. Once accounting for this risk premia, rates

markets are not signalling hike expectations from the Bank (Figure 3Rateexpectationscurveforthegiltsstilleaningtowardsacut). Governor Bailey

stated similar views in his latest remarks following the BoE's June meeting. That

suggests to us that front-end yields have plenty of room to rally - mostly from lower real

yields. We think Bailey's statement is particulary important as he has been the key

decider in the MPC even prior to conflict when the votes among the members have been

very close. Especially when we see the peak in inflation only by November. According to

our curve framework, which use our economists' forecasts to project slope levels over

the upcoming quarters, it is the Bank's easing that will be the key driver of 2s10s

steepening over the next 12-months (Figure 4Ourcurvemodelbasedonmacroeconomicforecasts2s10scouldstepentowards80bps)

Steeper curves from fiscal concerns

If Andy Burnham were to signal his willingness to deviate away from the fiscal rules, we

think the gilt curve would steepen. His recent comments that he will abide by the fiscal

rules have capped the upside to gilt yields from domestic factors, in our view. As

mentioned above, the rally in yields has been more about lower inflation breakevens

rather than a decline in real yields. We think the markets will be closely monitoring