Divyang Shah, Senior IFR Strategist
Outgoing governor King says that it is premature to say we are at beginning of the end and will soon need to raise interest rates.
“I think people have rather jumped the gun thinking this means an imminent return to normal levels of interest rates. It doesn’t.”
- Mervyn King testimony to the Treasury Select Committee in Parliament on Tuesday
As with the ECB, the BoE is looking to focus on the theme that policy will remain accommodative and that the CB is not closer to moving interest rates higher.
Remember that even the Fed is looking to make a distinction between tapering QE (taking foot off the pedal) and hiking interest rates (stepping on the brakes) but this distinction has been falling on deaf ears and the frustration seems to be showing on some Fed members, with Fisher choosing to warn of ‘feral hogs’.
We have chosen to play against expectations of a higher rate path for the BoE and ECB via:
1) a Jun5 Euribor call spread with 99.375-99.500 strikes as well as a receive 12x24 EONIA at 45bp, as well as
2) receiving 1y1y GBP at 1.10%.
The pricing of higher rates came about largely because recent moves have not been a risk-off or risk-on phenomena but a complete fire sale of positions irrespective of the underlying fundamentals.
