Further room for Gilts to rally and spreads to widen

BOE buybacks is seen as a bullish force for Gilts, forecasting 10y rates to rally further in Q3 before selling off into year end. Also, Gilts is expected to continue to outperform swaps. 

"Being long the Sep-24 bond both outright and on asset swap as the middle maturity bucket has the lowest amount outstanding and should consequently benefit most from the buybacks. Furthermore Q3 traditionally sees a seasonal rally in UK rates, supporting our short-run bullish call", says RBC Capital Markets.

Amongst the recent hawkish noises from the BoE on rate hikes, the terminal level that Bank rate will reach this hiking cycle has also been a talking point. Outgoing MPC member David Miles put it around 2.5%, which is emerging as a consensus amongst the MPC. 

Yet with 5y5y SONIA down at 2.14% the market seems to be taking little notice.