UBS Fixed Income-UK Rates Strategy _UK inflation-linked not a dip to buy_ Ga...-109975093
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UK Rates Strategy
UK inflation-linked: not a dip to buy
RPI breakevens are at long-term lows. Is that an opportunity? Breakevens are often
mean reverting, but we don't think this is one of those times. RPI should transition
to a cheaper range, driven by value and a market that has the novel luxury of being
price-sensitive and value-conscious. We recommend to be short the 10y-20y area,
where supply remains concentrated. (We have 10y-20y-10y in coming weeks, then
in October-December, probably, 10y, 15y and 20y and a 30y syndication.) RPI is
likely to underperform fixings in months ahead, supporting the transition to lower
breakevens. But we caution that house prices could push RPI higher in 2025-26,
which makes us a little cautious on front-end. Expect the UKTI asw bid to be
sustained but to slow in months to come.
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RPI has been cheapening. A lot. But has it cheapened enough? If you just look at line
chart it’s hard not to think that it might have done. Taking 5y5y as a reference, we are
not only at a post-pandemic low, but a post-Brexit low, and there have certainly been
moments over the past eight years when generic concerns about inflation were lower
than now.
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But if you factor in the much more important break – RPI reform – it doesn’t look at all
like there’s a value case. Again with the 5y5y as our benchmark, the rate now nearly
entirely references the post-reform period, so the historical chart is no fairer a
comparison than comparing a toddler and a teenager. For a toddlers-to-toddlers
comparison, Figure 1How to compare GBP RPI 5y5y with its own history… filter in the long-term wedge. When you do that (light line) it doesn't look cheap. shows what 5y5y RPI implies about 5y5y CPI if you assume that the
5y5y RPI-CPI wedge will be a constant 75bp, which is probably roughly what most
people have in mind. (Page down for a bit more on the outlook for the wedge.)
Of course, this isn’t the chart people see on their market monitors, so some might be
fooled, but most are well aware of this and won’t just be doing long-term technical
analysis on the basic series.
(Memo: reform started to filter into 5y5y gradually following the announcement in
November 2020, as the forward period increasingly extended beyond the February 2030
reform date.)
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We are also going through a bit of a crisis of confidence for inflation linked globally, so
despite its fall, RPI isn’t especially flattered by comparison with US CPI or Euro HICP, for
example. Figure 2International comparison doesn't flatter RPI either. Everything is cheapening, but RPI is the wrong level., shows US CPI 5y5y compared to Euro HICPx 5y5y and UK RPI 5y5y
adjusted for the CPI reform as described above. (US CPI is also adjusted down by a
constant 0.3% in an attempt to correct for the expected PCE-CPI basis so that all the
lines can be roughly compared on the basis their central banks target inflation.) On this
roughly-comparable basis the US-UK 5y5y CPI spread has been reasonably stable at 60-
80bp since 2022, but looked at like this, RPI now at the wide end of that range.
This report has been prepared by UBS AG London Branch. )*$+$,+$-))./0..+-0&123456127
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Europe including UK
Strategist
giles.gale@ubs.com
+44-20-7901 6066
H+
Strategist
mike.cloherty@ubs.com
+1-203-719 4281
0I 22 August 2024 ab 2
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Source: UBS, Bloomberg
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Source: UBS, Bloomberg
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Fundamentally we shouldn’t be thinking about getting long 5y5y RPI for a while yet.
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The 5y5y RPI is expensive, but it has been underperforming on the curve. (The 10y-20y
area overall has been underperforming the wings, in fact.) 5y5y should have been
happening slowly as RPI reform filters in, of course, but that's a slow process and it has
been faster recently than that. If 5y5y isn’t cheap, neither is the rest of the curve.
$ ! ( #'% ( J
! Supply pressure will be largely in the 10y-20y area in coming months, while there
may be some reasonable concern about house prices and RPI over the nearer term. We
like selling anything from 10y to 30y in RPI, but optimally would sell 5y15y. That is now
3.135% in zero coupon swaps. This is a medium term trade where we target 2.75%.
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RP(%#
The market has doubted the UK’s ability to bring about disinflation for a long time.
Academics tend to agree that the UK has a particular home-grown problem, which is
visible to simpler analysts like your author as persistently higher wage inflation and the
recent growth recovery might not help with that. But as elsewhere, it seems more likely
that disinflation will proceed, even if it requires the MPC to be more cautious for longer
on rates.
The market is projecting RPI to bounce toward 4% y/y again by the end of the year.
Figure 3RPI historic y/y and market fixings. Fixings are high into 2025...shows the market projection. We think that’s unlikely. In fact it may come in a
long way short. Our official year-end projection is closer to 3.4%y/y, and strategy’s
modelling suggests that, after the summer, RPI will not get back above 3% until mid
2025, except for a blip in December.
0I 22 August 2024 ab 3
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Source: UBS, Bloomberg
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Source: UBS, Bloomberg
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One caveat that could be more supportive is that carry will turn positive in October, if the
market fixings are realised. The fixings are aggressive, we think, so that’s a strong
assumption, but in the UK market (which perhaps doesn’t study carry as closely as others
because it’s a longer-dated market overall) carry actually does seem to be a weak driver
of return.
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As a cross check, our CPI forecast for the UK is also benign, with core y/y stabilising at
close to 2% from next year. Economists’ consensus across the street is in this region too.
If that’s right, you’re asking a lot of the wedge components to sustain RPI in positive-
carry territory for breakevens. Unless there is another energy shock, that largely means
housing components.
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The main housing components that drive the wedge are mortgage interest payments
(MIPS) and housing depreciation, which are essentially house prices (Figure 4...higher fixings
are
possible, but much will depend on a house price recovery).
MIPS will continue to moderate from very-high levels to around 3.5%, we
estimate, as rate cuts offset the upward impact of low rate mortgage deals
expiring and being refixed at higher rates, but no more.
Depreciation really depends on your house price growth assumption, meanwhile,
and the press is full of speculation about a rebound in prices and activity as rates
fall. As a rule of thumb, 10% house price growth would contribute 0.78% to RPI,
and with CPI growing at 2%, it would add about 0.62% to the y/y wedge. We
can’t add that to the 5y5y but a total CPI-RPI wedge of more than 150bp isn’t hard
to imagine toward the end of 2025 and into 2026 if the more optimistic
projections for house prices come true. We think 5y RPI has this in the price, but it’s
something to monitor and we’re a little less confident about being short 5y RPI
than we were in H1 this year.
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Do any flow stories rescue RPI from the poor value story?
##!!!
The supply environment in principle isn’t very challenging. Linker supply has become just
a small proportion of the total, as Figure 6 shows. That’s in sharp contrast to the pre- and
early-pandemic period when linkers were nearly all the net supply.
摘要：
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abUKRatesStrategyUKinflation-linked:notadiptobuyRPIbreakevensareatlong-termlows.Isthatanopportunity?Breakevensareoftenmeanreverting,butwedon'tthinkthisisoneofthosetimes.RPIshouldtransitiontoacheaperrange,drivenbyvalueandamarketthathasthenovelluxuryo...
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作者：西装暴徒
分类：外资研报
价格：免费
属性：11 页
大小：1.06MB
格式：PDF
时间：2024-09-09
