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2-Year Gilt/OAT Yield Spread Eyes ’24 Lows

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The 2-Year gilt/OAT spread trades relatively near the ’24 closing low (99.1bp), last ~105bp.

  • This comes at an interesting juncture given the political uncertainty France faces and the lack of clarity when it comes to the Labour Party’s ultimate policy goals in the UK.
  • Meanwhile, BoE pricing trades towards the dovish end of the multi-week range, showing ~15bp of cuts for the August MPC and just under 50bp of cuts through year end.
  • The impending appearance from BoE chief economist Pill could be key for the spread.
  • We have noted that Pill is generally seen as the most hawkish internal MPC member. If he strikes a more dovish tone it would likely be interpreted as a dovish shift for all of the internal members and increase the probability of an August cut.
  • The 2-Year Gilt/OAT spread would move closer to the 100bp and ’24 low in that instance.
  • Meanwhile, some hawkish pushback from Pill would result in some knee-jerk widening.
  • Note that benchmark rolls skewed the spread wider in January.

Fig. 1: Gilt/OAT 2-Year Yield Spread

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The 2-Year gilt/OAT spread trades relatively near the ’24 closing low (99.1bp), last ~105bp.

  • This comes at an interesting juncture given the political uncertainty France faces and the lack of clarity when it comes to the Labour Party’s ultimate policy goals in the UK.
  • Meanwhile, BoE pricing trades towards the dovish end of the multi-week range, showing ~15bp of cuts for the August MPC and just under 50bp of cuts through year end.
  • The impending appearance from BoE chief economist Pill could be key for the spread.
  • We have noted that Pill is generally seen as the most hawkish internal MPC member. If he strikes a more dovish tone it would likely be interpreted as a dovish shift for all of the internal members and increase the probability of an August cut.
  • The 2-Year Gilt/OAT spread would move closer to the 100bp and ’24 low in that instance.
  • Meanwhile, some hawkish pushback from Pill would result in some knee-jerk widening.
  • Note that benchmark rolls skewed the spread wider in January.

Fig. 1: Gilt/OAT 2-Year Yield Spread

Keep reading...Show less