UK Rates: Hurtling towards Brexit – TDS

According to analysts at TDS, the outlook for UK Gilts remains conditional on the ultimate route to Brexit and limited spare capacity suggests the BoE’s policy normalization would be fairly opportunistic, taking advantage of any favourable incoming data or positive news around Brexit negotiations.

Key Quotes

“We continue to recommend Sonia 1y-3y1y (OIS) steepeners.” 

“In our base case view of how Brexit plays out, we see bearish forces dominating Gilts in 2018 and thereby hold a steepening bias for the curve. We initiate 2s10s Gilt steepeners in our model portfolio at 83bp with a target of 105bp and a stop of 74bp. We express this view via short 5y5y UK vs EU IRS in the cross-market space.” 

“We also think that swap spreads should have a tightening bias due to higher Gilt yields and greater supply. We hold on to the short 10yr ASW view (cash underperforms swaps) and also initiate short 30yr ASW (cash underperforms swaps) in our model portfolio as a tactical trade at 28bp with a target of 40bp and a stop of 22bp. The biggest risk with the 30yr is LDI receiving, but we expect it to be muted over the next few months.”

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