HSBC Gets It Right With Long Gilts Call in Serendipitous Timing

(Bloomberg) -- Timing is everything.

HSBC Holdings Plc recommended investors increase bets on lower U.K. rates by entering an outright long position in five-year gilts on April 26. The next day, the worst British economic growth figures in years caused markets to slash the odds of a Bank of England interest-rate increase in May to 20 percent from above 50 percent. Five-year gilts surged, with the yield sliding as much as eight basis points.

“It looks increasingly like BOE tightening may be done before it really got started,” said Daniela Russell, HSBC’s head of U.K. rates strategy. “If they are not going to hike in May, then the market should price out hikes for the foreseeable future as well. By the time August or November comes around, the case for tightening is set to be even less compelling than it is now.”

HSBC suggested the three-month trade recommendation when the yield on five-year gilts were at 1.24 percent on Thursday, targeting a drop to 1 percent with a stop loss at 1.42 percent. The yield was down six basis points at 1.17 percent as of 1:55 p.m. London time.

The bank’s call comes after it already advised investors position for lower rates. In a note to clients dated April 17, Russell had recommended re-entering long positions in the front-end of the gilt curve via receiving two-year-one-year Sonia.

Attractive Level

“We’ve been bullish on gilts for some time and particularly like owning the front-end,” she said on Friday, adding the recent climb in yields driven by factors outside of the U.K. present “an attractive level at which to buy.”

At the start of April, traders in the money market had priced in a 91 percent chance of a BOE rate increase next month. Now they don’t see such a move until December.

If the BOE still goes ahead with a hike next month, it would likely be a coupled with dovish rhetoric, according to Russell. Moves in yields on in such a scenario would likely be “confined to the sub two-year sector, putting bear-flattening pressure on the front-end of the curve,” leaving five-year yields well supported, she said.

“We used to think it would be ‘May and done’ for the BOE, but now we wonder whether it’s ‘May or never’,” Russell said.

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Marco Bertacche

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