Rates: The hidden force pushing gilt yields to record highs
The desk posits that the recent surge in 10Y gilt yields is significantly influenced by the Bank of England's quantitative tightening (QT) alongside inflationary pressures and political uncertainties. Per the full note source, the steepening of the 2s10s GBP curve by 60 basis points more than its USD counterpart underscores the impact of increased gilt supply. This divergence may continue as market dynamics evolve, particularly in light of potential shifts in monetary policy from the BoE.
What the desk is arguing
ING argues that the surge in 10Y gilt yields to record highs is not solely due to inflation and political risks but significantly influenced by the Bank of England's QT program. The resulting increase in gilt supply has steepened the 2s10s curve by 60bp more than the USD curve, and ING expects this divergence to continue.
Supporting evidence includes the observation that the gilt yield spike has outpaced US Treasuries, with QT adding duration supply that markets must absorb. ING implicitly rejects the counterfactual that QT's impact is already priced in, suggesting ongoing risks for gilt holders.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04–1.12, reflecting a modestly bullish USD view. This aligns with ING's emphasis on yield divergence favoring the USD, as higher gilt yields alone do not outweigh broader dollar support.
Firms in our coverage have varied targets: Barclays targets 1.10 (Mar26), JPMorgan targets 1.10 (Mar26), Goldman Sachs targets 1.10 (Mar26), Morgan Stanley targets 1.08 (Mar26), Deutsche Bank targets 1.05 (Mar26), and BofA targets 1.04 (Mar26). Our view sits between the more bullish (Barclays, JPMorgan, Goldman) and bearish (BofA) poles, consistent with a moderate USD preference.
How other firms see it
Other firms have mixed views on the gilt yield divergence. Barclays aligns with ING, noting QT's impact on curve steepening. JPMorgan also aligns, citing persistent supply concerns. Goldman Sachs is more neutral, seeing the yield divergence as temporary, while BofA is contrary, arguing that inflation and growth will eventually push gilt yields lower. Deutsche Bank aligns with ING's curve steepening thesis but focuses on Bunds rather than gilts.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoE's QT is amplifying gilt yield moves, steepening the curve vs. US.
- 02GBP/USD faces additional headwinds from yield divergence and supply dynamics.
- 03ING expects the 2s10s GBP steepening vs. USD to continue.
Market implications
The ongoing divergence between gilt and UST yields, driven by QT, could further weaken GBP/USD as rate differentials widen. FX traders should monitor BoE QT announcements and gilt auction results, as increased supply may keep UK yields elevated relative to the US, reinforcing a bullish USD bias. Steepening in the 2s10s GBP curve also impacts fixed-income strategies, favoring short-duration positions in gilts.
Risks to this view
Key risks include a slowdown in QT pace or a shift in BoE hawkishness due to growth concerns, which could reverse the steepening. Conversely, if US inflation reignites and forces the Fed to tighten more aggressively, USD divergence could deepen. Political risks in the UK, such as fiscal policy changes, may also exacerbate gilt volatility.
The 10Y gilt yield hit new highs on the back of inflation and political risks, but investors should not ignore the role of the Bank of England’s QT in this. We estimate the 2s10s GBP curve steepened by 60bp more than the USD curve due to the increased gilt supply and the divergence can continue. This could also be a lesson for Warsh who may look to walk a similar path
Sources & References
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