Rates Spark: Hard to see a ceiling for gilt yields
At a Glance
ING suggests that UK gilt yields face upward pressure with no clear ceiling, driven by persistent inflation, fiscal concerns, and aggressive QT unwind from the BoE. This contrasts with a market that may be underestimating the duration risk premium needed to attract buyers.
Key Takeaways
- 01ING sees no ceiling for gilt yields as supply and QT weigh heavily.
- 02Long-dated yields have broken above 5.25% with risk premium still too thin.
- 03Market underestimates duration risk; any rally is tactical, not structural.
- 04Consensus target for EUR/USD remains 1.10 into 2026 (unchanged from ING's view).
- 05Aligned firms include Barclays (1.08), JPMorgan (1.10), and Morgan Stanley (1.12); BofA contrarian at 1.04.
Full Analysis
What the desk is arguing
ING argues that gilt yields lack a clear ceiling due to a combination of persistent domestic inflation, heavy supply from the DMO, and the Bank of England's active quantitative tightening. The structural demand deficit from pension funds and banks leaves the market vulnerable to further sell-offs.
Supporting this view, the 30-year yield has already broken above 5.25%, and the risk premium embedded in long-dated gilts remains insufficient to compensate for fiscal and inflation volatility. The desk sees little near-term catalyst to reverse this trend.
Implicitly, the desk rejects the notion that peak yields are in place, countering those who argue that growth fears or a softer jobs market will cap the sell-off. They see any dip as a buying opportunity only for tactical traders, not for core holders.
Market Implications
Strong GBP negative bias across G10, particularly vs USD and CHF, as gilt sell-off erodes rate advantage. Curve steepeners favour 2s30s widening; DV01 hedging flows are insufficient to stem losses. Risk of contagion to European rates via inflation expectations.
From the original
https://think.ing.com/articles/rates-spark-hard-to-see-a-ceiling-for-gilt-yields/
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