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 (less negative swap spreads) as we draw closer to the referendum vote and will look to enter into a 10s30s swap spread curve steepener if that spread flattens back down to the –65/-75bps range ahead of the referendum. On the front end we look to re-enter Dec16/Dec17 Short Sterling steepeners if this spread re-flattens towards 7bps—we view this as an attractive post-Referendum fade trade.”
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