UK Rates: The fall and rise of Brexit premia - TDS

Renuka Fernandez, Senior Rates Strategist at TD Securities, suggests that a couple of weeks back they noted that markets had significantly priced lower Brexit premia and saw risks of a sharp re-pricing on UK rates.

Key Quotes

“We saw opportunities then to receive the 1y1y Sonia and for the Dec 16/Dec 17 Short Sterling spread to re-flatten to the 15-20bps range. As expected we’ve had a sharp re-pricing. The Dec 16/Dec 17 Short Sterling spread is at 15bps from a peak of 26bps, 10y Gilts at 1.39% from a peak of 1.63%, and the OIS forwards are pricing in 12bps of cuts for the Dec meeting.

We look now to re-enter into the Dec 16/Dec 17 Short Sterling steepener if it returns to our original 7-12bps range. Near term event risk is the BoE rate decision/inflation report on 12 May. Whilst the BoE have stated they would be less sensitive to data in the run-up to the EU Referendum, the weakness in the data has accelerated and UK rate markets now appear more sensitive to UK data, which could push the spread marginally lower towards our range.

We revisit our long-end 10s30s swap spread steepener trade idea. We flagged it at –67bps and it rose to –55bps. We did not enter into the trade as it moved too quickly to –65bps and we favoured the lower end of the –65bps to –75bps entry range. The spread is now back down to –62bps — we look for opportunities to enter in our target range as Brexit risks rise, data disappoints and campaigning continues in full force.

We continue to hold a 5y forward 5s10s GBP swap curve steepener and rec 2y GBPUSD x-currency basis swap vs. pay 2y EURUSD basis. Both trades are Brexit hedges and are benefitting from a re-pricing higher of brexit premia and a shift lower in UK data beyond pure Brexit related concerns.”