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BofA Weigh In On The Outlook

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Bank of America note that their “Chief UK Economist now looks for three more 25bp BoE rate hikes (June, August, September) compared to our previous call of one more. This raises our terminal rate call to 5.25%.”

  • “In turn, we now forecast 10-Year Sonia at 4.50% by year-end, underperforming relative to forwards and our forecasts for other markets. Our new Bank Rate profile implies 2-Year at around 5.00%.”
  • “It is hard to believe an effective net 2023 supply of Gilts equivalent to 8%/GDP (DMO and BoE combined) can be met without heavy overseas involvement. Reversion to the norm of a larger current account deficit and reliance upon the kindness of strangers seems inevitable, informing our bearish stance on UK rates.”
  • “The Gilt selloff following the inflation upside surprise underpinned our 1-Year forward 1s3s Sonia flattener and pay UKTi 2027-2032 forward real yield trades. We reiterate both:”
  • “The tax advantage of owning low coupon Gilts goes up for retail investors as yields rise, so we think it is worth reiterating the story now. We continue to hold onto our trade (sell UKT 4.125% 2027 Gilt vs. UKT 0.125% 2028).”
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Bank of America note that their “Chief UK Economist now looks for three more 25bp BoE rate hikes (June, August, September) compared to our previous call of one more. This raises our terminal rate call to 5.25%.”

  • “In turn, we now forecast 10-Year Sonia at 4.50% by year-end, underperforming relative to forwards and our forecasts for other markets. Our new Bank Rate profile implies 2-Year at around 5.00%.”
  • “It is hard to believe an effective net 2023 supply of Gilts equivalent to 8%/GDP (DMO and BoE combined) can be met without heavy overseas involvement. Reversion to the norm of a larger current account deficit and reliance upon the kindness of strangers seems inevitable, informing our bearish stance on UK rates.”
  • “The Gilt selloff following the inflation upside surprise underpinned our 1-Year forward 1s3s Sonia flattener and pay UKTi 2027-2032 forward real yield trades. We reiterate both:”
  • “The tax advantage of owning low coupon Gilts goes up for retail investors as yields rise, so we think it is worth reiterating the story now. We continue to hold onto our trade (sell UKT 4.125% 2027 Gilt vs. UKT 0.125% 2028).”