Trade Synopsis: PAY 2YR SONIA 

Trade Recommendation: PAY 2YR SONIA (CMP 4.38), TP 4.50 & SL 4.28 

UK 2-year SONIA looks set to test the 4.50 levels sooner than later. Technically it is 76.4% retracement of the entire move between 4.80 & 3.76 levels in the last 1 year. Fiscally, UK economy is in a high service inflation & low growth phase. It's current service inflation level of 5% is way above what is required (3%) to get headline inflation to 2%. In addition, the recent tax hikes has led to flight of growth capital leading to almost zero growth in Oct-Dec'24 which implies weak interest servicing capabilities of the UK government in medium term. The current uptick in UK gilts at a 23-year high is not going to go away immediately until UK Chancellor Reeves slashes spending to cover the rising costs of payments on government debt. The combination of a weaker pound and higher relative gilt yields has echoes of August-September 2022, and if this continues, could potentially be evidence of a buyer’s strike or capital flight from UK bond markets. 

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