SWAPS: UK Swap Spreads Sell Off
UK swap spreads sell off as gilts once again struggle during a hawkish round of repricing driven by a sharp increase in energy prices.
- Market potentially considering the impact of UK fiscal support if any further escalation in the Middle East drives an extension higher in oil and/or gas prices, while the risk of a more elongated conflict after the Israeli attack on the South Pars gas field also increases the potential for more meaningful fiscal support.
- 30-Year swap spread now ~8bp off cycle closing highs registered earlier in the month and less than 1bp off month-to-date closing lows.
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GILTS: Away From Lows
The downtick in equities provides some background support for gilts, but futures remain within the pre-existing session boundaries.
- Session highs located at 92.02, shielding the January 22 high (92.13).
- Yields ~2bp lower across the curve.
- 10s once again near uptrend support (4.381%). A break there would target the year-to-date low (4.336%).
- Earlier headline flow surrounding expedited UK defence spending does little, partly owing to the increased political uncertainty in the UK.
- Recent headlines noting that the government abandons plans to cancel 30 local elections in England (see recent bullet from our political risk team for more) also do little for markets, but potentially increase the odds of a Labour leadership challenge
- GBP STIRs remain unable to fully discount 50bp of further cuts for the current cycle.
- ~18bp of easing priced into BoE-dated OIS for March, 24bp through April, 33bp through June and 48bp through year-end. Markets are unable to fully discount 50bp of additional easing for the current cycle at this stage.
- SONIA futures flat to +2.5, SFIZ6 still respects pre-existing year-to-date highs (96.750).
- UK labour market data is due tomorrow, with CPI due Wednesday (expect our full preview shortly).
- Market expectations are roughly attuned to BoE forecasts for labour market data. We think pricing for a March cut will increase further if the data is broadly in line,
- UK CPI is expected to move lower in January, with the February MPR looking for a print of +2.9% Y/Y and the BBG consensus looking for +3.0% Y/Y.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA (bp) |
Mar-26 | 3.550 | -17.8 |
Apr-26 | 3.489 | -23.8 |
Jun-26 | 3.401 | -32.7 |
Jul-26 | 3.338 | -39.0 |
Sep-26 | 3.297 | -43.0 |
Nov-26 | 3.254 | -47.4 |
Dec-26 | 3.246 | -48.1 |
EURIBOR OPTIONS: Outright Call buyer
ERZ6 99.00c, bought for 0.75 in 10k.
SCANDIS: Interaction With Trendline Resistance Is Key For NOKSEK
NOKSEK is off session highs but remains up 0.38% today at 0.9420. The cross has pierced trendline resistance drawn from the March 2022 high. A clear break of this trendline would reinforce bullish conditions, but we caution that it has failed to do so on a few occasions over the past three years (e.g. August 2022, November 2024). Next resistance levels to watch are around 0.9450 and 0.9500.
- Spot has narrowed the gap to our simple fair value estimate based on 2-year nominal rate differentials and an oil/gas composite proxy (currently at ~0.95).
- Several analysts made hawkish revision to their Norges Bank projections last week following the higher-than-expected January CPI-ATE reading. SEB have followed suit, delaying their forecast for the next cut from June till December (followed by another cut in March to a terminal of 3.50%). Danske Bank meanwhile have pushed their June cut call to September (followed by cuts in December and March to a terminal of 3.25%)
- There was little reaction to this morning’s Swedish LFS data, with the pullback in the volatile unemployment rate fully driven by participation changes.
- The remainder of this week’s Scandi calendar is light until Swedish final January inflation on Friday.
Figure 1: NOKSEK Since 2022 (Source: Bloomberg Finance L.P)
