NatWest Mark 10-Year Yield Call Higher, Expect Continued Cross-Market Underperformance

NatWest note that “for a number of our views, yesterday’s inflation print was a game-changer. We now expect Bank Rate to rise to at least 5% and have materially revised up our inflation forecasts.”

• “Markets were quick to adjust to this, front-end Gilts look close to fair value again.”
• “At the longer-end of the curve, however, the data just reinforces our bearish view. We have long held an out-of-consensus 4.30% target in 10-Year Gilts. This was driven in large part by the supply-demand imbalance we expected this year, with the DMO and BoE undertaking significant sales programmes and the natural buyers of Gilts notably absent.”
• “Despite a considerable underperformance in Gilts already (including 10s reaching our 4.30% target), we expect these buyers are unlikely to have a meaningful bid for UK duration until there is confidence that inflation is on a clear downward trajectory and there is more certainty that Bank Rate is near a peak.”
• “Taking into account this persistent lack of demand and our updated Bank Rate and inflation views, we revise our target in 10-Year Gilts to 4.60%. Expect Gilts to continue to underperform cross market and vs. swaps.”