Get 100% ad-free experienceBank of England’s QT Tweaks Can’t Solve Structural ProblemsView all comments (0)0Sterling markets remain sensitive to US dynamics and risk pricing in a too dovish path of easing by the Bank of England. Any tweaks to the pace or composition of quantitative tightening would not solve the fiscal concerns that underlie the (global) rise in longer-dated rates. Meanwhile, Wednesday’s US 10yr auction tailed. Not great! 30yr up next.A Bank of England Cut Is Expected, but Comments About QT Going Forward Are of More InterestMarkets are perfectly aligned with quarterly Bank of England (BoE) cuts, including Thursday’s widely expected cut, but we see risks of sterling rates getting too carried away by US dynamics. The bullish move in US rates on the back of payroll disappointments also reduced markets’ pricing for the BoE landing zone by about 10bp. Whilst we do argue that the BoE may still end up cutting more than currently priced, the still hot UK inflation dynamics do not warrant a more dovish view at the time being. As such, we favour fading US-driven spillovers on the front end of the sterling curve for now.Of more interest may be comments about tweaking the path of quantitative tightening (QT) going forward, with the aim to relieve some of the upward pressure on the long end of the curve. The 30Y Gilt still trades at a yield close to the record high since 1998. To alleviate the supply side, the BoE could reduce the pace of QT, which until September stands at £100bn annually. With plenty of liquidity still in the system, another way of addressing the concerns is by shortening the maturity of the bonds that are being sold. Whilst we think such solutions could help in the near term, the fact remains that the UK faces serious fiscal challenges and upward pressures on longer rates are a global phenomenon. Any such tweaks would not address the more (global) structural challenges faced by Gilts.US 10yr Auction Tails by 1bp – Not GoodThe big miss in the 10yr auction was lower direct bidding, essentially real money players. That was down at below 20% compared with closer to 24% in the past six months. Dealers had to take down some 16% vs a more typical 10% in the past six months. That’s two tailed auctions in a row (after the 3yr on Tuesday), with the 30yr to come tomorrow. These tailed auctions certainly question appetite for yields at current levels, despite all of the supportive rate-cut talk.Remember, when you see the 10yr at c.4.2%, you need to view this as really c.3.7%. Why? Because there is a 50bp swap spread to SOFR. 10yr SOFR at 3.7% is not that high when we consider that the market discount is for the funds rate to bottom at around 3%. Effectively that’s a 70bp curve from the funds rate to 10yr SOFR – not particularly steep. So if wondering why not enough buyers at c.4.2% on the 10yr Treasury, that’s part of the answer.***Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read moreOriginal PostBank of England’s QT Tweaks Can’t Solve Structural ProblemsView all comments (0)0Latest commentsInstall Our AppScan QR code to install appRisk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. 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