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Divergence continues as 10s30s steepens

GILTS
  • The divergence between UK markets and other fixed income markets continues this morning.
  • Gilts have moved lower with the curve steepening and the long-end in particular seeing yields rise. The Bank of England confirmed this morning that it intends to end it's programme of long-dated gilts as scheduled at the end of this week, and has also increased the size of this week's operations to a maximum size of GBP10bln/day (up from a maximum of GBP5bln/day previously).
  • Furthermore during Friday's operation the Bank confirmed that it was accepting offers that were submitted at a yield of -0.1ppt to the mid-yield. This to us suggests that takeup will be higher this week as the market now knows what offers it needs to submit in order for the Bank of England to buy gilts.
  • There are probably some pension funds that have yet to sell their long-dated gilts, but may want to delever their long-dated gilt holdings ahead of the Bank of England withdrawing from the market.
  • Note that the 10s30s curve is now back up to 17.9bp, way above the lows of -33.2bp seen on 30 September but still marginally lower than the 20.4-59.6bp range that had been seen since early July.
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