Some profit taking limits moves lower

There has been some divergence between gilts and other core fixed income this morning.

• Gilt initially opened lower, following some decent labour market data and in line with moves seen in Bunds and Treasuries saw downward pressure as risk sentiment improved, driven by events in Russia. There was also strong downward pressure on the SONIA strip.
• However, with so much priced into the curve and ahead of the crucial inflation print tomorrow morning, it appears that some short sellers have been taking profits, leading to gilt outperformance (and particularly the front-end of the SONIA strip).
• Despite the moves back, we still see 43bp priced for the March meeting, 81bp for May, 110bp for June and 130bp by August (i.e. one 50bp and three 25bp hikes more than fully priced) with a further 25bp hike fully priced by November. 2-year gilt yields also remain 1.1bp higher on the day, and above the psychological 1.50% level.
• The biggest moves have been in terms of a flattening of the curve. On the back of a decent auction, the 10-year gilt has performed well with yields down 1.8bp while 30-year gilts have seen even bigger moves with yields down 2.7bp on the day.
• 2y yields up 1.1bp today at 1.515%
• 5y yields up 1.0bp today at 1.511%
• 10y yields down -1.8bp today at 1.570%
• 30y yields down -2.7bp today at 1.618%
• 2s10s down -2.9bp today at 5.5.bp
• 10s30s down -0.9bp today at 4.8.bp