UK: Spotlight on the US result – Deutsche Bank

Jack Di-Lizia, Strategist at Deutsche Bank, suggests that the US election result will dominate as a near term driver and the UK is likely to take its lead from US markets.

Key Quotes

“The US election result and its aftermath should set the tone for Gilts over the near term, at least until the upcoming Autumn Statement.”

“The upcoming Autumn Statement is likely to only lead to a modest rise in financing requirement which should limit market impact. We would expect the additional financing to be split between up to GBP 5bn of additional t-bill sales and the remainder allocated to Gilts in line with the current bucket distribution.”

“In terms of trades, the UK front end has reflected the steepening of the US money market curve and the slope out to 2018 is now at the steepest levels since the referendum. With considerable uncertainty remaining over the impact of the Brexit process, the potential for further steepening from current levels is limited. We recommend L Z7 L Z8 flatteners.”

“Further out the curve the significant excess flatness of 10s30s following the UKT 2065 re-opening has now largely corrected. With seasonal dynamics, upcoming cashflows and the potential for year-end LDI hedging flows following the recent backup in yields, we tactically exit the UKT 10s30s steepener, although we retain our longer term steepening bias.”

“We maintain the short 10Y GBP real rate. The hard Brexit repricing has seen real rates lag while the BoE’s more hawkish shift at last week’s IR suggests they would lean against additional inflationary pressure. UK real rates also remain extremely rich on a cross market basis.”