Goldman: Higher Term Premium To Steepen Gilt Curve.

Goldman Sachs note that “following weak European CPI data, UK duration traded well last week.”

• “In a week without major data releases, mortgage approvals and lending surprised to the downside, showing some slowing of the housing market, which has so far remained relatively resilient to the rapid rise in mortgage rates.”
• “However, underlying inflation dynamics remain challenging.”
• “While the BoE has been reluctant to hike, our economists believe that persistent inflationary pressures will push the bank towards more tightening, to a terminal rate of 5.25% (in September).”
• “The market is pricing a terminal rate close to 5.50%, and we think risks are skewed towards under-delivery.
• “In particular, we think the risk of 50bp adjustments is low, as it is unlikely that the MPC would find agreement given the extent of tightening it has already undertaken.”
• “While the bank could under-deliver and Gilts might seem cheap cross-market, we think a high term premium is warranted as it reflects a more uncertain UK inflation outlook, elevated Gilt supply (and QT) with more constrained domestic demand and relatively poor market liquidity. For these reasons, we also expect a steeper Gilt curve.”