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GILTS: Yield Jump Notable Not Exceptional, Could Be Sticky Given Drivers

GILTS
CEEMEABulletUKGlobalFixed Income BulletsRegionMarkets

While the 2-day net moves in gilt yields are no doubt notable, the chart below shows that such moves have not been particularly rare in recent years.

  • The chart also reminds us of the scope of the move that followed the Truss ‘mini’ Budget, with this week's sell off far more contained.
  • These moves, however, feel somewhat stickier than the sell off that followed the Sep ’22 Budget, which was aided by the well-documented LDI deleveraging.
  • The move seen over the past 2 days has instead been driven by a mixture of increased inflation expectations and the risk of increased issuance over the medium-term.
  • Another matter to consider is that the recent weakening comes at a time when the BoE is looking to loosen policy. Meanwhile, in Sep '22, the BoE was on a well-established tightening path.
  • Higher yields and inflation do not provide particularly fertile grounds for an easing cycle, with the BoE policy rate still ~150bp above the estimated neutral level (based on the latest MAPS survey).

Fig. 1: 2-Day Net Change In 2- & 10-Year Gilt Yields (bp)

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While the 2-day net moves in gilt yields are no doubt notable, the chart below shows that such moves have not been particularly rare in recent years.

  • The chart also reminds us of the scope of the move that followed the Truss ‘mini’ Budget, with this week's sell off far more contained.
  • These moves, however, feel somewhat stickier than the sell off that followed the Sep ’22 Budget, which was aided by the well-documented LDI deleveraging.
  • The move seen over the past 2 days has instead been driven by a mixture of increased inflation expectations and the risk of increased issuance over the medium-term.
  • Another matter to consider is that the recent weakening comes at a time when the BoE is looking to loosen policy. Meanwhile, in Sep '22, the BoE was on a well-established tightening path.
  • Higher yields and inflation do not provide particularly fertile grounds for an easing cycle, with the BoE policy rate still ~150bp above the estimated neutral level (based on the latest MAPS survey).

Fig. 1: 2-Day Net Change In 2- & 10-Year Gilt Yields (bp)

Keep reading...Show less