GBP Swaps: Gilts roar… linkers roar louder. 1y2y RPI focus

Baloon inflation night 9 Jul 2020


  • Gilts roar… linkers roar louder

  • 1y2y RPI focus as 5y busy

  • New issues: ADB


    Gilts roar… linkers roar louder

    Today saw the end of something new and the beginning of something old, as equities and fixed income finally split, with fixed income exiting the falling aeroplane, pressing the ejector seat button and activating the parachute, while equities remained strapped into their aisle seat.


    Equities, to be fair, did find their descent slowing, with the FTSE down 2% at the start of the day and closing down a mere 1.6%, but in stark contrast, shortly after the 4:15pm close today, the 2y gilt yield was down 11bps, 10y yields were down an almost indecent 16.5bps at 1.655%, and 30y plunged 14.5bps to 1.915%. ASWs were mostly wider, with the 5y +1.1bps at 64.6bps, 10y was +0.9bps at 7.2bps while the 30y was -0.1bps at -35bps.


    Not to be outdone by nominals, real yields plunged too, with the 0.125% 2024 RY down by 30bps at -5.45%, the IL32 was also last seen 30bps lower, at -2.67%, and the IL73 RY finally broke below its April 27 syndication RY pricing (it came at -1.645%) to reach -1.675%, which is down a mere 20bps on the day.


    So what on Earth was going on to drive these moves. Looking at the broader picture, one swapper at an active GBP market participant said this evening that “in previous sessions the equities sold off and fixed income went with them. But it’s reached the point that equities have sold off so much that bonds had to break free and the flight-to-quality trade returned.”


    “Today is the first day of a dramatic return to the old ways of divergence between the two markets.”


    A rival swapper summed up the move in nominal gilts today by saying that “the market was very alert to the slowdown in GDP and particularly the services component (monthly GDP data today fell 0.1%). It is pricing in two more rate hikes but the question is being asked, ‘how much can the BOE hike when it knows hikes won’t address inflation?’.”


    1y2y RPI focus as 5y busy

    One reason offered for the outperformance of linkers today was, of course, gas, and the news of supply problems via Russia’s Ukraine pipeline, and fresh signs that Russia is willing to hit Germany’s gas supply.


    One GBP inflation trader said this evening that while linkers had an outstanding day, both in terms of RY and a very strong B/E performance, RPI swaps had their moments too.


    In particular he said that the very front end (where 2y RPI ended +20bps at 6.79%) saw a lot of early action. “There are two guys really, who have decided that the 1y (RPI swap) has rallied too much who were bidding 2y from the start, at one point it was +15bps while 1y hadn’t moved. Three months ago if 2y had rallied 15bps, then 1y would definitely have been +20 or 25bps.”


    Anyway, he said that this ‘levelling out’ trade for 1y versus 2y, driven by those 2y bids and 1y2y trades into a semi-liquid-at-best front-end of RPI petered out fairly quickly. The 2y RPI closed +20bps at 6.79%, by which time the 1y had mechanically caught up to be quoted +20bps too, which is still an underperformance compared to what would have been normal weeks and months ago.


    The main liquidity point on the curve today was the 5y RPI swap which saw macro hedge funds bidding and some profit-taking as it rallied about 15bps on what was a lively session of bull-flattening.


    New issues: ADB

    • Asian Development Bank today priced a £500m, May 2029, SONIA +20bps Gender Social FRN via BofA, Citi (B&D) and RBC.