Goldman Provide Their Pre-BoE Gilt Overview

Ahead of this week’s BoE decision Goldman Sachs note that “the latest downside inflation surprise and PMI miss raise the possibility of a smaller hike, and with pricing for the August meeting stuck in the mid-30bp region, the decision will force a market adjustment to the very front-end one way or another.”

• “The BoE will be more reticent on the possibility of a pause in comparison to both the Fed and the ECB.”
• “Although this supports higher front-end yields vs other G10 curves, we think that this relatively hawkish stance means that Gilts are unlikely to underperform other major bond markets - the combination of slightly weakening data and a BoE that continues to hike rates should reduce inflation fears in the long end of the UK curve.”
• “That said, we continue to expect cheapening of Gilts vs GBP OIS across maturities. Over the last two weeks there has been a bigger compression of 2y and 5y swap spreads - we think this trend will continue as i) the market gains visibility around the terminal level of the Bank Rate, thus reducing swap curve volatility, and ii) expectations build for an announcement of an acceleration of BoE QT, a possibility recently flagged by Deputy Governor Ramsden.”