UK Gilts: it has to get worse before it gets better UK Gilts: it has to get worse before it gets better UK Gilts: it has to get worse before it gets better

UK Gilts: it has to get worse before it gets better

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The Bank of England is trapped. Following this morning's CPI numbers, it may need to hike to levels that might be uncomfortable for the financial sector. The front part of the yield curve is poised to rise towards 5% as swap spreads revert to their mean, but as yields approach this level, chaos might ensue, forcing the BOE to step in to save the day. We are monitoring the 2-year Gilt yields, which, if they break above 4.68%, will find resistance at 5.57%, a level not seen since June 2008. As 2-year yields test the 4.68% level, the BOE will ring the alarm bells and try to cap their upside. Within this uncertain environment, we prefer to keep duration at a minimum.

The BOE has no other choice than to continue to tighten the economy

The Bank of England has a big problem.

The central bank missed its inflation target since 2021, and according to its estimates, which assume a constant interest rate of 4.5%, it will only be able to bring it back to the target in the last quarter of 2024.

Those estimates need revision. The road towards 2% looks to be bumpier than the BOE forecasted. Today’s UK CPI numbers showed that the UK core CPI rose to 6.8% YoY in April, the largest increase on record, while it was estimated to come at 6.2%. The monthly headline inflation figures came at 1.2%, almost double what was forecasted, which, if annualized, would bring inflation to 14.4% YoY.

When assessing monetary policy, it helps to acknowledge that the BOE is mandated to protect price and financial stability. That differs from the Fed's dual mandate, which requires the central bank to maintain stable prices while seeking to foster growth and maximize US employment.

Therefore, the BOE must continue tightening the economy until its chief goal to meet the 2% inflation target is met despite advancing unemployment.

Source: Bloomberg.

The BOE is behind the curve

The UK Gilt yield curve is much less inverted than the US yield curve. 

Source: Bloomberg.

The reason behind such a difference is that markets believe that the Fed has finished tightening, and since March, investors have started to position for a pause. A much flatter yield curve in the UK indicates that the BOE's tightening job is not over yet.

Two-year Gilt yields will continue to rise but will unlikely break above 5%

From this morning, markets are pricing three full rate hikes this year and are close to forecasting even a fourth hike bringing the forecasted terminal rate to 5.50%.

Together with quantitative tightening, rate hikes should help swap spreads to tighten back to their mean.

Source: Bloomberg.

The prospect of a much higher terminal rate brings my focus to the front part of the Gilt yield curve, which will likely remain under pressure in the following months.

In particular, I like to look at the 2-year Gilt yields, which have broken above resistance at 4.20% this morning, and they find their next resistance is at 4.67%, a level that was last seen in September in the aftermath of the Truss' mini-budget. With the terminal rate now expected at 5.25%, it's easy to envision the 2-year rise towards this level.

However, the BOE has a problem with it. The sudden surge in gilt yields last September ignited a series of events that forced the central bank to step in and buy long-dated gilts to tame volatility. That series of events concerned pension funds, which saw margin calls in their interest-rate swap positions triggered as yields surged, but they didn't find enough collateral to post.

The same is likely to happen also this time, and the BOE should be concerned that this moment is approaching because if 2-year Gilt yields break above the 4.68% level, they'll find resistance next at 5.57%, a level last seen in June 2008. Following the events of last fall, it is clear that the financial system cannot take rates that high yet; hence, it is safe to assume that the central bank will not allow rates beyond 5% and step in to cool off the sell-off earlier than that.

Source: Bloomberg.

For the same reasons, the BOE will be on alert if 10-year Gilt yields test 4.59%.

Source: Bloomberg.

What instruments should I look at?

  • Bond Futures. In the Saxo Platform, you can find Gilt futures which can also be traded as a CFD (FLGM3, FLGU3)
  • ETFs. The WisdomTree 10Y 1x and 3x Daily short is designed to provide once or three times the inverse daily performance of the Long Gilt Rolling Future index (1GIS:xlon, 3GIS:xlon). In case you are interested in trading particular segments of the yield curve, you can refer to the iShares UK Gilts 0-5 year (IGLS:xlon), SPDR Bloomberg Barclays 15+ Year Gilt UCITS (GLTL: Elon).
  • Cash bonds. If you want to secure some of the high yields in the front part of the yield curve, you can use the instrument screener. In the highlight are bonds in the front part of the curve, such as the United Kingdom's 5% March 2024 (GB0030880693).
Source: Bloomberg.

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.