Hidden Force Pushing Gilt Yields to Record Highs

The Bank of England's persistent £70bn annual QT program has caused the GBP 2s10s curve to steepen 60bp more than the US curve, driven by increased gilt supply and a shift toward price-sensitive foreign buyers.

Key Takeaways

• 1.The Bank of England's active Quantitative Tightening (QT) is a primary driver of the 60bp relative steepening of the GBP 2s10s curve compared to the USD curve.
• 2.The Bank of England maintains an aggressive QT pace of £70bn per year, supported by liquidity facilities (STR and ILTR) that stabilize bank reserves.
• 3.Increased gilt supply has forced reliance on price-sensitive foreign investors, who now represent over 25% of syndication uptake, up from 10% pre-QT.

Table of Contents

• Global factors add to GBP term premium, but not entire story
• Global term premia are strongly correlated but domestic factors play a role too
• When accounting for 2Y dynamics, the GBP curve recently steepened more than the USD curve
• QT seems to play a part in explaining a 60bp steeper GBP 2s10s curve
• Significant pickup in BoE liquidity facilities are preventing reserves from falling, allow QT to continue
• Since QT, gilt markets have relied on more price-sensitive foreign investors, helping push up 10Y gilt yields
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