/SWAPS: NatWest: Long 1y1y GBP Vs USD, 2s10s Gilt Steepeners

NatWest note that “the UK has taken a backseat to banking sector concerns and central bankers in recent weeks. Front-end rates have participated very weakly in the global shift lower. 1y1y USD is ~150bp lower than in early March, but 1y1y GBP has rallied just ~40bp. Does such a low sensitivity make sense?”

• “Stickier inflation expectations and improving growth prospects (albeit from a very weak base) may explain the relative underperformance of front-end rates, but not the high relative level of rates. UK banking sector resilience is a difference with the US, but not Europe. Mortgage paying is probably a reason, with a slight pick up in 2y fixes, but mortgage business is down and shouldn’t be enough to drive a 100bp underperformance in front-end UK rates.”
• “We see value in being long GBP 1y1y vs USD. Heavy gilt supply keeps us more bearish the long end, though. We’ve been in cross-market steepeners (short 10y gilts vs 3y treasuries) since February, but now prefer to hold these steepeners on the gilt curve given our front-end UK views. We switch into 2s10s GBP steepeners instead.”