TD Securities Recommend 5s30s Flatteners

TD Securities write “steepening has been the consistent theme across curves since the December pivot from the Fed. Even though we favour a structural steepening view for 5s30s Gilt curve, the move is more likely to come closer to the March Budget. For now, we favour a tactical flattening bias.”

• “UK front-end is currently pricing around 125bps in rate cuts in 2024. We doubt that the BoE will entertain additional rate cut pricing with wage service inflation still being sticky. This limits further performance of the front-end for now.”
• “Following the upcoming 30y deal, the general skew of supply will shift towards the short/medium part of the curve. The DMO primarily has 3 more long auctions remaining for the fiscal year as compared to 10 auctions skewed to the shorts/mediums. QT skew has also reduced for longs in Q1.”
• “Duration benefits from £31bn in redemptions in end of January.”
• “5s30s curve or 30y outright both look attractive on a cross market basis.”
• “We see flattening drivers more prominent for now in the Gilt curve. This in particular holds in absence of big data or supply surprises holding steepeners can be rather punitive on carry.”
• They recommended entry at 66bp, targeting a move to 40bp, with a stop set at 82bp.