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Potential energy price freeze hitting SONIA and gilts

GILTS
  • Gilts are under pressure as there is lots of focus on Truss potentially freezing energy bills at current levels rather than allowing the price cap increase in October (and January) which is leading to concerns about a big increase in borrowing (and large increase in gilt supply - we noted this as a risk in the recent UK Issuance Deep Dive).
  • However, short-term gilts and SONIA futures have seen even bigger moves as the market sees the BOE as less concerned about recessionary impacts and able to focus more on inflationary issues - 2-year yields are up 10.2bp on the day at writing with markets now pricing in 68bp for next week's meeting (from 66bp Friday close), 192bp by year-end (181bp Friday close) and 279bp by June 2023 (265bp Friday close)
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