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ONS energy price announcement weighing on gilts

GILTS
  • Gilts are bucking the trend in core FI and are lower this morning (against Bunds and Treasuries which are both largely flat on the day).
  • The main news for the UK today is the ONS announcement that it would treat the government's energy support plans as direct transfers rather than price reductions - so CPI and RPI would be unaffected. This is probably the reason for the gilt underperformance. Although the Bank of England had always assumed this would be how the ONS would treat the measures, sellside economists had been split and with many still likely to look at headline CPI or RPI when negotiating wage settlements, this announcement does risk more second round effects.
  • There is still very little known on Liz Truss' cost of living support package plans (and she remains the clear favourite to be named the new PM on Monday).
  • As inflation will be unaffected by flat reductions to each household, there is now much more incentive for Truss to lower the unit pricing of energy - and less incentive to have more progressive targeted and fiscally more frugal packages.
  • Gilt futures are down -0.15 today at 108.72 with 10y yields up 3.0bp at 2.732% and 2y yields up 3.3bp at 2.932%.
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