Goldman: Terminal Rate Pricing Out Of Room To Decline

Goldman Sachs write “over recent months, UK terminal rate pricing has declined by more than 100bp from the highs.

• “While we see some justification for this we think this repricing is reaching its limit, at least in the near term.”
• “Our analysis shows that the drag from BoE policy is likely to be prolonged but manageable.”
• “This suggests to us that markets won’t reach clarity on whether the current BoE stance is sufficiently restrictive for some time.”
• “For that reason, we think front-end longs have a less attractive value proposition in the UK than in G3 peers.”
• “Further out, UK rates are a prime spot to express concerns about fiscal risk.”
• “On the front end, we note that, while the debt sustainability is not quite as challenging in the case of the UK, the corresponding supply of duration is hard to match, with UK DMO gross maturity at issuance still close to 14y on average in recent months.”
• “This is another reason why we think the scope for UK duration outperformance is limited and favour ongoing tightening in 5y and 30y Gilt swap spreads.”