RBC Recommend Tactical 10-Year Gilt/Bund Tightener Ahead Of BoE

RBC recommend a tactical tightener in the 10-Year gilt/Bund spread.

• They note that “during yesterday’s session, we saw early signs that the narrative driving markets has started to move away from the China slowdown theme. Despite the commodity recovery, global bond yields moved sharply lower.”
• “We suspect that markets are now shifting focus back to economic surprises.”
• “Yesterday’s rally also led to technical breakout in UK yields.”
• “None of the gilt/Bund spread widening has been due to shifts in BoE rate cut expectations.”
• “Additionally, the gilt supply calendar into August starts to become supportive of gilt outperformance into the seasonal supply hiatus.”
• They conclude that “for those inclined to be positioned for a BoE dovish outcome, we think being tactically in UK/EUR spread tighteners presents a decent risk/reward expression in the current environment.”