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BONDS: Growth Divergence May Factor Into Gilt Underperformance

BONDS
BulletFixed Income Bullets

Diverging growth expectations between the Eurozone and the UK may be factoring into today’s Gilt/Bund spread widening, given broader EGB spreads to Bunds (e.g. OATs and BTPs) are tighter. The 10-year Gilt/Bund spread has widened around 4bps today, approaching 172bps.

  • A relatively stronger growth outlook would suggest a more cautious easing cycle from the Bank of England compared to the ECB. OIS markets currently reflect this, with BoE-dated OIS pricing 67bps of easing through first meeting of 2025, compared to 93bps in ECB-dated OIS.
  • In the BoE’s August MPR, Q3 2024 GDP growth was projected at 1.5% Q/Q, up from 0.5% in the May MPR. Although the Q3 2025 projection was a little below May’s level (0.8% vs 0.9% in May), the Bank included an upward skew at this horizon.
  • Meanwhile, Eurozone Q2 preliminary GDP growth was 0.3% Q/Q (0.26% unrounded), below the ECB’s June projections of 0.4%.
  • A reminder that overnight comments from Chancellor Reeves around capital gains tax speculation did not provide much new information relative to last Monday’s statement, although she did not push back on possible changes in the way UK debt is calculated (amid some estimates that excluding BoE QT losses from overall debt could free up GBP17bln more fiscal headroom for the UK).
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Diverging growth expectations between the Eurozone and the UK may be factoring into today’s Gilt/Bund spread widening, given broader EGB spreads to Bunds (e.g. OATs and BTPs) are tighter. The 10-year Gilt/Bund spread has widened around 4bps today, approaching 172bps.

  • A relatively stronger growth outlook would suggest a more cautious easing cycle from the Bank of England compared to the ECB. OIS markets currently reflect this, with BoE-dated OIS pricing 67bps of easing through first meeting of 2025, compared to 93bps in ECB-dated OIS.
  • In the BoE’s August MPR, Q3 2024 GDP growth was projected at 1.5% Q/Q, up from 0.5% in the May MPR. Although the Q3 2025 projection was a little below May’s level (0.8% vs 0.9% in May), the Bank included an upward skew at this horizon.
  • Meanwhile, Eurozone Q2 preliminary GDP growth was 0.3% Q/Q (0.26% unrounded), below the ECB’s June projections of 0.4%.
  • A reminder that overnight comments from Chancellor Reeves around capital gains tax speculation did not provide much new information relative to last Monday’s statement, although she did not push back on possible changes in the way UK debt is calculated (amid some estimates that excluding BoE QT losses from overall debt could free up GBP17bln more fiscal headroom for the UK).