Short 10s On A 2s10s30s Fly

NatWest write “with the exception of the late-September vol., 10s have been outperforming on the 2s10s30s fly relatively consistently since early 2022.”

• “At the front-end, an evermore hawkish BoE reaction function in response to higher and more persistent inflationary pressures has driven 2s10s flatter. At the long-end, supply has weighed as the natural buyers of gilts have been noticeably absent.”
• “Both of these dynamics might have moved enough, though.”
• “At the long-end, although we don’t think that supply risks have evaporated, they might weigh less heavily at the long-end than in recent months. LDI is showing tentative signs of returning to life, and this could continue as we near terminal rates and there is more confidence over the downward trajectory of inflation.”
• “A return of some demand at the longer-end of the curve, coupled with another shift towards the short and medium buckets in the updated gilt remit in the Autumn could mean that supply pressures weigh most heavy at the belly.”
• “The 2s10s30s fly has bounced from record lows, but is still very stretched . It’s also not particularly directional in the current environment, making it a reasonable way to express a view on the macro themes affecting 2y and 30y.”