UK Rates: trading brexit risks – TDS

By FXStreet As we approach the June 23rd UK referendum on EU membership, analysts at TD Securities looked at implications for the UK rates market.

Key Quotes:

“The market reaction to the Scottish referendum is a useful case study. Taking outright duration positions is tricky in our view — rather we would expect curves to steepen, basis spreads to tighten, swaption volatilities to rise and on a cross country basis, gilts to underperform treasuries and outperform bunds.

The market continues to price the first full 25bps hike from the BoE in Q1 2019, with 5bps of cuts priced in for this year. We see little scope of a significant repricing on the front end ahead of the referendum and would position for continued Brexit uncertainty heading into June via FRA-OIS wideners.

In recent weeks we have seen some sharp moves on the long end of the UK curve — in particular we have seen steepening in the 10s30s cash curve and an accelerated inversion in the 10s30s swap spread curve. Whilst we have seen some reversal in these moves over the last three weeks we consider these dynamics in the context of rising Brexit risks ahead of the June 23 referendum.

We favour swap spread wideners …read more

Source:: FX Street