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Early Cheapening Extends


Firmer, Futures Show Above Recent High

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Gilts are trading modestly higher,.....>

GILT SUMMARY: Gilts are trading modestly higher, paring some of the very heavy
losses seen Tuesday, supported by disappointing UK average weekly earnings.
Prices are off best levels however, weighed by 10-yr Gilt re-opening auction.
- 2-yr Gilt yield is -2.5bp at 0.268%, 5-yr -2.6bp at 0.540%, 10-yr -2.1bp at
1.126% and 30-yr -2.3bp at 1.780% according to Tradeweb.
- Gilts opened little changed and then ticked higher led by decent buying in the
short-end which initially bull steepened the yield curve. Although at the same
time traders reported seeing large selling in the short sterling strip as
markets priced in higher chance of an interest rate hike by the BoE this year.
- Average weekly earnings remaining at 2.1% in the 3-months to July compared to
MNI median forecast for a rise to 2.4% than saw gilts squeeze higher. The move
was limited though as unemployment surprisingly dropped to 4.3% from 4.4%.
- A drop in demand at the 10-yr Gilt re-opening auction for Stg2.5bln then
weighed slightly on Gilts, but they remained underpinned by expectations BoE
will continue to vote 7-2 for rates to remain on hold.
- Breakevens have widened in region of 1.8bps as markets see CPI remaining high.

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