Wednesday, February 20, 2013

UK

Let’s take a quick look at the UK term structure.

We had recommended on Jan/10 that strategists look to own (L – S) this curve, with a reminder on Jan/28 that “any sober trader” wants to look for further expansion; under no circumstances look to sell the spread. The 5 – 10 spread is some 18 wider, 2 – 30 some 30 wider, with generous price gains on both wings of the trade.

Now what?

Central bank generosity in the face of price pressures is the recipe for an expanded term structure; this is especially true when policy makers make no secret that above-target inflation prints will be tolerated.  We did not predict that King, Fisher and Miles would argue for an increase in purchases; however, we always maintained that the Bank would remain biased for further accommodation through H1. 

Those who may have been long from early Jan will want to take in half the gains, maintain the balance.  For those who may have hesitated, our view is that the course-of-least resistance for this spread, H1, remains wider. No need to be in a rush (never a good idea) but consider an entry point ongoing.


Robert Craven

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