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1 Feb 2016
UK rates reacted sharply to the BoJ cut - TDS
FXStreet (Delhi) – Renuka Fernandez, Senior Rates Strategist at TDS, suggests that after the UK rates reacted sharply to the BoJ cut, they see opportunities to pay front end UK rates.
Key Quotes
“Risk/reward is quickly shifting in favour of positioning for higher UK rates - a further move lower in yields from here would really need the BoE to actively ease. The moves across the UK swap surface resemble, in shape, the moves across the JPY surface - suggesting the price action of a bank in easing mode, which is not reasonable in our view.
Whilst the moves across the UK swap surface have been fairly uniform, risk/reward looks the most attractive across the 1Y-2Y tenors where levels are at extremes from fair value (PCA derived).
We recommend a Dec 16/Dec 17 steepener in short sterling at 33bps, target 44bps, stop loss 27bps.
This can similarly be expressed with an outright short in 2y gilts (1% UKT 2017) at 34bps, targeting 59bps , with a stop at 24bps, as well as 12X24 Sonia.”
Key Quotes
“Risk/reward is quickly shifting in favour of positioning for higher UK rates - a further move lower in yields from here would really need the BoE to actively ease. The moves across the UK swap surface resemble, in shape, the moves across the JPY surface - suggesting the price action of a bank in easing mode, which is not reasonable in our view.
Whilst the moves across the UK swap surface have been fairly uniform, risk/reward looks the most attractive across the 1Y-2Y tenors where levels are at extremes from fair value (PCA derived).
We recommend a Dec 16/Dec 17 steepener in short sterling at 33bps, target 44bps, stop loss 27bps.
This can similarly be expressed with an outright short in 2y gilts (1% UKT 2017) at 34bps, targeting 59bps , with a stop at 24bps, as well as 12X24 Sonia.”