GILTS: STIR: BMO Take Profit On Most Trades, Duration Bias Cautiously Short

BMO’s “central expectations for the BoE and the Budget have not changed” but they note that “market pricing has changed very significantly in just a couple of weeks.”

• As result, they highlight that “the risk/reward of our favoured trades has changed too - and near-term event risk has risen. What’s more, the fundamental backdrop has shifted slightly in ways potentially unfavourable to the bond market.”
• They conclude that “it is time to take profits on: long duration, money-market curve flatteners, bond yield steepeners and long UK vs US bonds.”
• Still, they would maintain long gilts vs swaps exposure, “especially in 8-12 year maturities: the more positive long-term fiscal outlook remains unchanged.”
• They “tentatively suggest switching from being long duration to being cautiously short: because at current valuations we see more upside than downside to yields around the upcoming risk events. Indeed, we think, depending on what happens in the US, that there could be a very substantial reversal of the recent rally before gilts begin to offer value again.”