Big day for ASWs, 2s5s10s, RYs
In a year of horror-days for lovers of small gilt market moves, today was a standout. The MPC may have hiked slightly less than expected (by the market anyway, if not its strategists) but mis-positioning and QT saw gilts – and real yields – go on a lurid journey.
And there’s more to come. But first, looking at today, one GBP trader said this afternoon that “the market was very nervous after the Fed and its hawkish tone, so early in the session the GBP short-end saw yields rise while SONIA sold-off, straight from the open.”
Then, he continued, “a lot of the move came back as the market stabilized ahead of the MPC. The market was roughly 50:50 on 50bps versus 75bps but there was a rumour of of a delay in QT, or a reduction in its scale.”
The swapper said that “however, the BOE said in its Minutes ‘NO!. It’s business as usual with QT, so prior to that there had been some nervousness in ASWs, where people had been short gilts versus swaps, correctly. But that QT delay talk saw people buying gilts versus swaps ahead of the MPC, so ASWs rallied 5bps in the 10y sector, only to end the day 5bpas lower, so a 10bps range for ASWs which even nowadays is massive.”
He continued to say that gilts “collapsed” once QT was confirmed as initially planned (£80bn of buying over the next 12 months), while the market saw the three votes for 75bps as hawkish and there was an unusual pattern to selling that saw 5y to 30y yields close 18-19bps higher in parallel as the 10y sector led a painful bear-steepening in USTs.
Swap spreads meanwhile, at the 4:15pm close, were -4.6bps in 5y, -3.5bps at 2.5bps in 10y and -5bps in 30y. The front-end and the long-end were affected most by future hike expectations and by supply respectively, while in 10y, said the above swapper, the “the market is pricing out some of the medium-term cuts that had been expected to follow sharp hikes, and pricing in a longer period of hikes because of the energy cap’s impact on spending and therefore inflation.”
This had a big impact on the 2s5s10s IRS fly, said the swapper. “It surged nearly 110bps today, to a high of +11bps, a massive move for this, especially having only just got up to positive territory yesterday.”
Also going massively positive were linker real yields. One inflation trader noted that while “today was a nominals-driven day,” real yields moved even more than nominals out to about 30y, with even IL73 RY rising 18bps to +1bp. And with IL28 at +26bps late in the day and IL52 at +20bps, rates at the long end are positive for the first time since 2013 in some cases.
Next up, Chancellor Kwarteng, then DMO
Chancellor Kwarteng’s speech on Friday is the big event of the day, followed by the DMO’s revised remit. Looking at the prognosis for this unusually busy Friday one swapper said “we might see another big seller of gilts when Kwarteng speaks.”
“But they might make sure energy cap details may only go out for three months,” in order to cap market reaction at the same time as energy prices. But the DMO’s revisions going out three months could be huge (and upwards) because of tax cuts.” He said there are a lot of questions tomorrow, particularly about how the DMO will structure changes to the coming year’s supply load (for banks' guesses see here and here).
Anything, he warned, could happen tomorrow.