Wednesday, March 18, 2015

UK Budget Market Reaction

Large rally  in European rates, which is led by UK rates. For a change! 

Or so says the headline. Really? UK DMO estimates a GBP 133 billion issuance against analysts expectation of GBP 147 billion. That causes the long end to rally 8bps at pixel time although it is GBP 126 billion more than last year? There is something seriously missing from the narrative.

Rather it is mostly seems BoE minutes pricing out rate hikes any time soon, as well as repricing of terminal rates. The UK PMI has been weak, wage growth not encouraging, the ECB QE driven outflows from Eurozone sure to hit UK gilts and BoE is nowhere as willing to consider rate hikes as the Fed. Also is there any housing correction in London? As a result the 2s5s flattens 4bps, 5y spread between US and UK widens 7bps, and the overall move is bullish led by the belly.

UK long end has further room to go. So stay bullish. 

What is more interesting is the catch up of the GBP long end gamma vol, relative to US. In terms of realized vols, I think US performed better. Too much priced in for the Election?

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