GILTS: /SWAPS/STIR: Some Favour 2s10s Steepeners

Amongst the sell-side notes that we have read some favour 2s10s steepeners, with little in the way of meaningful view changes surrounding the BoE and outlook for gilts apparent in the latest round of weekly publications.

• BofA: A hike from the ECB could up the pressure for the BoE the following week. We remain paid June MPC OIS.
• J.P.Morgan: We take profit on paid Sep ‘26 MPC OIS. 1Yx1Y SONIA has risen to 4.30% but is broadly in line with our ‘Strait of Hormuz Limbo’ scenario. We stay neutral. However, in the event Burnham wins the Makerfield by-election and launches a leadership challenge we continue to expect limited visibility on any potential fiscal policy changes until much closer to the Budget. We stay neutral 10-Year gilts with yields 30bp below our ‘energy shock’ scenario. The 2s/10s gilt curve looks modestly too steep vs. high frequency drivers but we don’t fade given ongoing strong negative directionality vs. front end yields. We maintain a flattening bias on 10s/30s gilts
• BMO: We expect the BoE to keep Bank Rate on hold all year. If we are right a buy-and-hold strategy in 2s will outperform cash, although near term 2s’ performance will be decided by oil. Medium- and long-term gilts will continue to suffer from a combination of weak inflation credibility, political policy risk and high supply. We recommend a 2s10s steepener, with a longish time horizon. Carry is positive in both gilts and swaps. We target at least 15-20bp steepening. A wide stop-loss is necessary, given 2s’ high correlation with oil prices.
• Goldman Sachs: Despite a strong narrative around political and supply risks for the UK bond market, 10-Year gilts have quietly performed quite well on ASW over recent weeks. Gilt risks have relaxed since mid-May with our term premium estimate declining by around 25bp. We think the relative stability - if not strength - of gilts on ASW is supporting evidence for the view that risk premium in the curve is currently more macro-driven rather than supply-driven. Given that fiscal uncertainty is likely to linger through any potential Labour leadership contest, we think that further macro relief is required for gilt outperformance, namely additional certainty around the path for inflation, and confirmation that the inflation path is consistent with the BoE on hold. We prefer 2s10s curve steepeners given its compatibility with both macro relief and a sticky fiscal risk premium into the Makerfield by-election.
• Societe Generale: Receive UK 2Y swaps vs U.S. Relative policy expectations remain too hawkish in the UK vs the US. Target 15bp spread.
• UBS: UK rates remain exposed to spillovers from the U.S. and this has been the case for the past three decades. At the margin, we expect UK rates to be relatively more sensitive than euro area rates to US rates developments. Ultimately a weakening economy should outweigh inflationary pressures and we like receiving September vs. July BoE.