GBP Swaps: Long end strength helps to squash curve

Chart numbers candles 14 Jun 2022
A double-digit rally from 10 to 50y squashed the curve amid talk of mortgage paying at the front end. Meanwhile linkers digested recent supply.

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  • Long end strength helps to squash curve

  • LDI chaos lingers in gilt futures: BNPP  

  • New issues: Severn Trent Utilities, GreenSquareAccord


    Long end strength helps to squash curve

    Demand for the long end of the curve was the standout flow today with yields down 10-13bps from 10y right out to 50y, led by the 20y area. Shorter in, the DMO sold £3.5bn in 0.25% 2025 gilts with lowish bid to cover of 1.89 and, amid reports of mortgage paying at the front end, 2s/10s gilts flattened by 11.6bps to -8.4bps, re-inverting for the first time since October 5. Similarly 5s/10s gilts was pulled down by 8.6bps to -16.1bps but in contrast 10s/30s was little-changed at 18.5bps.   


    In linkers, yesterday’s £1.5bn in IL73 supply didn’t prevent a 10bps rally in IL73 real yields today, even though the bond bounced off -50bps yield lows as it lost ground going into the close. IL73 breakevens ended unchanged on the day after reversing mid-afternoon weakness, and performed despite 4-8bps of tightening shorter on the breakeven curve, along with a 2-5bps dip in long-dated RPI swaps.


    Also in the mix, corporate supply arrived in 12y and 25y with big order books, while slightly stronger-than-expected but basically unchanged PMIs (the composite came in at 48.3 versus a 47.5 forecast and 48.2 last month) were followed late in day by typically hawkish comments from BOE Chief Economist Huw Pill. Pill warned that the Bank had “more to do” in order to “address inflationary pressures” and normalise monetary policy. Even so, Pill repeated that he did not anticipate that a rise in Bank rates above 5.25% would be “required”.


    SONIAs fell by 1-2bps out to Dec23 on talk of mortgage hedging but rose by 5-10bps in the greens, with the strip now pricing a peak of 4.62% for Jun23.         


    Finally asset swaps moved in wide range with the 2y richening 5bps from session lows to end around 119.4bps (+0.7) while 5y asset swaps fell steadily to 73.5bps (-4.9) and 30y slipped to -43.1bps (1.7) despite the double-digit rally in long-yields, after spreads came off sharply into the close.    


    The BOE published its market notice for the unwind of financial stability gilt purchases after the close, starting Nov 29. The Bank states that its approach to sales will be demand-led (link):


      "...As a general principle, the Bank will accept bids that are deemed attractive relative to prevailing market levels. This means that the Bank will not allocate bids that are lower than prevailing market mid prices, as published by Tradeweb at the close of the specified window. Bids at or above the prevailing market mid price will be allocated competitively. This means that where, individually or collectively, participants bid for more than the available amount of a gilt, bids will be allocated based on the attractiveness of bids relative to market prices. To provide potential purchasers with clarity, the Bank does not expect to change the calibration of this pricing approach regularly."


      "...To ensure unwind does not trigger renewed dysfunction, the Bank will typically not sell individual gilts which have experienced a significant fall in price ahead of a window. Specifically, the Bank will not allocate bids for gilts in a window where the submitted price is significantly lower than the previous trading day’s close."


    LDI chaos lingers in gilt futures: BNPP  

    BNP Paribas gilts research this week examines some of the issues around the futures roll and CTD. Volumes in Dec22 and Mar23 futures today were around 321K and 126K, respectively. The bank writes,


      “We see a legacy of September’s gilt market volatility in much smaller open interest than in recent times, reducing the overall amount of rolling activity into the first notice date of 29 November.”


      “CTD optionality remains a key issue at current yield levels, and the rebound from the extreme yield highs has put UKT 4h34 back as the CTD. However, this is currently analogous to a straddle position, and we see switch potential either way.”


      “CTD switching changes the future DV01, and therefore increases/decreases the contract hedge amounts. Along with the optionality itself, this is driving the large positive CTD net basis. Repo richness persists for UKT4q32, something to bear in mind if there is a switch in CTD to this gilt. A noteworthy difference in CTD boundaries between G Z2 and G H3 introduces a further element to the pricing of the roll.”


    New issues: Severn Trent Utilities, GreenSquareAccord

    • Severn Trent Utilities (Baa1/BBB+) sold a £400m 12y unsecured Sustainability bond at gilts +160bps through Barclays, BofA, CIBC and Lloyds (B&D). Books above £3.4bn.


    • Social housing provider GreenSquareAccord (A3/A) sold a £400m (£100m retained) 25y secured Sustainability bond at gilts +210bps. Leads are Barclays, Lloyds, MUFG and NatWest. Books above £1.3bn.