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Curve flattens as terminal rate moves lower and FinStab sales are strong

GILTS
  • Gilts today have been pulled higher by two aspects: first they have been pulled higher from a reduction in terminal pricing globally following less hawkish-than-usual comments from ECB's Holzmann. Second, there has been continued (but slow) follow through from yesterday's BOE Financial Stability sales operation in which the vast majority of remaining gilts bought for the "temporary" programme have now been sold back to the market.
  • 2y yields down -4.5bp today at 3.403%, 5y yields down -8.3bp at 3.374%, 10y yields down -9.0bp at 3.465% and 30y yields down -10.6bp at 3.798% as the curve flattens: 2s10s is 4.6bp flatter today at -0.1.bp and while 10s30s is 1.6bp flatter at 33.3bp.
  • Yesterday's BOE Financial Stability Portfolio sales saw huge takeup. In nominal terms only GBP210mln of long-dated gilts (of which GBP180mln is the 0.875% Jan-46 gilt) and GBP363mln of linkers (of which GBP169mln is the 1.25% Nov-27 I/L gilt) remain to be sold. This compares to initial nominal holdings of GBP17.2bln for longs and GBP6.1bln for linkers.
  • Another Financial Stability Portfolio sales operation is due to be held today (results shortly after 15:30GMT) and it is now just a matter of time before the Bank will have completely unwound its holdings.
  • Looking ahead, we will hear from external MPC member Catherine Mann tomorrow as she is due to give a lecture at the Manchester Business School on Thursday entitled “Challenges facing the UK economy, challenges facing monetary policy: a comparative look.” There is no text due to be released from the event, and Mann was the sole hawkish dissenter in December looking for a 75bp hike, so even if she still sounds hawkish it would not necessarily be a concern for the market. It might be more significant if she was to sound less hawkish, however.
  • We also have November activity data due for release on Friday (including monthly GDP).
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