UK Rates: The Fall and Rise of Brexit Premia - TDS
Renuka Fernandez, Senior Rates Strategist at TD Securities, suggests
that a couple of weeks back they noted that markets had significantly
priced lower Brexit premia and saw risks of a sharp re-pricing on UK
rates.
Key Quotes
“We saw opportunities
then to receive the 1y1y Sonia and for the Dec 16/Dec 17 Short Sterling
spread to re-flatten to the 15-20bps range. As expected we’ve had a
sharp re-pricing. The Dec 16/Dec 17 Short Sterling spread is at 15bps
from a peak of 26bps, 10y Gilts at 1.39% from a peak of 1.63%, and the
OIS forwards are pricing in 12bps of cuts for the Dec meeting.
We
look now to re-enter into the Dec 16/Dec 17 Short Sterling steepener if
it returns to our original 7-12bps range. Near term event risk is the
BoE rate decision/inflation report on 12 May. Whilst the BoE have stated
they would be less sensitive to data in the run-up to the EU
Referendum, the weakness in the data has accelerated and UK rate markets
now appear more sensitive to UK data, which could push the spread
marginally lower towards our range.
We revisit our long-end
10s30s swap spread steepener trade idea. We flagged it at –67bps and it
rose to –55bps. We did not enter into the trade as it moved too quickly
to –65bps and we favoured the lower end of the –65bps to –75bps entry
range. The spread is now back down to –62bps — we look for opportunities
to enter in our target range as Brexit risks rise, data disappoints and
campaigning continues in full force.
We continue to hold a 5y
forward 5s10s GBP swap curve steepener and rec 2y GBPUSD x-currency
basis swap vs. pay 2y EURUSD basis. Both trades are Brexit hedges and
are benefitting from a re-pricing higher of brexit premia and a shift
lower in UK data beyond pure Brexit related concerns.”
