/ SONIA futures: Why the underperformance today?

Gilts remain the underperformers in core fixed income today, underperforming both Treasuries and Bunds. The moves are led by the front end with the curve bear flattening.

• Markets have moved back to pricing around 139bp of hikes in 2022, higher than at any point last week. Market pricing for Fed and ECB hikes in contrast is more consistent with last week's pricing.
• So why the difference for the UK?
• First, inflation is already higher than in the Eurozone and that is with consumer energy prices having been limited to date. Higher energy prices will help to push inflation even higher while the government is still looking to raise national insurance in April, hitting the cost of living even more and hence exacerbating the stagflationary effects in the medium-term.
• Second, the BOE's reaction function. MPC members seem much more prepared to go ahead with rate hikes and to front-load them. This is in stark contrast to the ECB where appetite to raise rates has dissippated quickly due to the Ukraine war. The reaction function seems closer to the Fed's, but natgas prices in the US are not seeing anywhere near the increases that are being seen in Europe.
• Third, the increase in market pricing today sees around 25bp less hikes priced into the UK this year than had been seen in mid-February. Markets were already pricing around 25bp less for the Fed ahead of today's moves. So this is more a catchup move for SONIA futures and gilts.