2 May 2016
UK Rates: Setting up for a return of Brexit Premia – TDS
Renuka Fernandez, Senior Rates Strategist at TD Securities, notes that iIn recent weeks UK rates have risen due to significant re-pricing lower of Brexit premia—spurred on by a sharp move higher in betting odds of Remain, which got as high at 75% intraday.
Key Quotes
“We see risks building for a correction on UK rates, as the market prices higher Brexit risks.
We see a near term opportunity to receive the 1y1y Sonia and see risks that the Sept 16/Sept 17 and Dec 16/Dec 17 spreads decline to 15-20bps as the markets price higher Brexit premia and chance of BoE rate cuts this year.
We favour curve steepeners if the market prices in greater odds of Brexit (ie a Brexit hedge). In particular, we like the 5s10s swap curve steepener in 5Y forward space, which carries positively. We enter the trade at 10bps, with a target 20bps and a stop loss of 4bps. We avoid expressing the trade in cash to avoid the complication of the market pricing in QE from the BoE in the event of a Leave vote.
We favour receive positions on the 2y GBPUSD cross-currency basis vs. pay 2y EURUSD cross currency basis. We enter at current levels of 25.4bps, target 15bps and have a stop loss of 33bps; the trade carries positively.”
Key Quotes
“We see risks building for a correction on UK rates, as the market prices higher Brexit risks.
We see a near term opportunity to receive the 1y1y Sonia and see risks that the Sept 16/Sept 17 and Dec 16/Dec 17 spreads decline to 15-20bps as the markets price higher Brexit premia and chance of BoE rate cuts this year.
We favour curve steepeners if the market prices in greater odds of Brexit (ie a Brexit hedge). In particular, we like the 5s10s swap curve steepener in 5Y forward space, which carries positively. We enter the trade at 10bps, with a target 20bps and a stop loss of 4bps. We avoid expressing the trade in cash to avoid the complication of the market pricing in QE from the BoE in the event of a Leave vote.
We favour receive positions on the 2y GBPUSD cross-currency basis vs. pay 2y EURUSD cross currency basis. We enter at current levels of 25.4bps, target 15bps and have a stop loss of 33bps; the trade carries positively.”