UK Rates: Hard Brexit noise fading but global drivers lead – Deutsche Bank

Jack Di-Lizia, Strategist at Deutsche Bank, suggests that the volatility in UK fixed income remains elevated with upcoming global event risk likely to set the tone as the market digests the Italian referendum result together with the upcoming ECB and Fed meetings

Key Quotes

“Hard Brexit noise has begun to fade, with the market unwinding Brexit premium as FX weakness has stabilized and the BoE has shifted towards a more neutral bias.  More recently, comments this week from David Davis, echoed by Chancellor Hammond, suggest a potential softening of the UK’s negotiation strategy.”

“The richening at the short end of the Gilt curve continues as non-resident buying together with demand for high quality collateral into yearend has led front end cash to outperform.  This echoes the recent move lower in EUR repo rates, as concerns over collateral availability have grown.”

“Despite the richening in the UK and Europe, the US front end remains less impacted, with the 5Y US-UK swap spread box now at historical wides.  With sterling weakness looking to have stabilized, the strength of foreign reserve manager rebalancing demand for Gilts may moderate.”

“Additional supply allocated to shorts following the Autumn Statement, together with the potential for the ECB to take broader measures to alleviate EUR collateral concerns, could also limit further richening of UK cash.  At the same time, were global collateral concerns to continue into year end, this would in turn become increasingly apparent in the US.  We therefore recommend selling 5Y GBP swap spreads vs. the US.”