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Gilts outperform ahead of BOE/ECB meetings

BONDS
  • Treasuries and Bunds are both off their overnight highs with yesterday's FOMC meeting now in the rearview mirror but the BOE and ECB meetings fast approaching. SONIA futures have almost seen as big a move as the Eurodollar strip overnight and BOE terminal rate expectations have seen the biggest move. This has led to a big outperformance for gilts - with 10-year yields moving 13.2bp since Tuesday's close against a 9.5bp fall for 10-year UST yields in the same timeframe.
  • The BOE rate decision, statement and MPR are all due at 12:00GMT / 13:00CET with the press conference starting 30 minutes later. The MNI Markets team expects a 50bp hike at the February 2023 MPC meeting, but see around a 30% probability subjectively of a 25bp hike instead. Markets currently price around 44bp, around a 78% probability of a hike today. We think there is better risk-reward to position for a dovish outcome than for a hawkish move due to our expectations that there could be a more dovish vote split than the market expects. For the full BOE preview click here.
  • The ECB rate decision is due at 13:15GMT / 14:15CET with the press conference due to begin 30 minutes later. The ECB is set to hike policy rates by 50bp at the February meeting – a position that has now been well telegraphed and fully priced by the market There is unlikely to be any surprise policy innovation beyond some technical details on how QT will be implemented Markets will look for any clues on the March policy rate decision and we believe it more likely than not that Lagarde will hint at a similar sized hike at that meeting. For the full ECB preview click here.
  • TY1 futures are up 0-28 today at 115-12+ with 10y UST yields down -9.6bp at 3.415% and 2y yields down -9.1bp at 4.112%.
  • Bund futures are up 0.44 today at 137.26 with 10y Bund yields down -2.9bp at 2.254% and Schatz yields up 1.0bp at 2.643%.
  • Gilt futures are up 1.20 today at 105.71 with 10y yields down -13.4bp at 3.196% and 2y yields down -11.7bp at 3.316%.
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