GBP Swaps: Let it flow, let it flow; New 10y CTD eyed

Herding wildebeest 10 Jun 2020
Today was Day Two of ten straight days of gilt supply, a mini marathon that the market is so far coping with. Trads meanwhile eyes a new CTD.

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  • Let it flow, let it flow; Market firm as giltstorm forecast

  • After busy rollover, Tradition eyes the next 10y CTD

  • New issues


    Let it flow, let it flow; Market firm as giltstorm forecast

    Today was Day Two of ten consecutive days of gilt supply, a mini-marathon running until Dec 9, just to test the market’s stamina at the end of a slightly fraught year. And today’s offering was the first sale of the financial stability gilt purchases made in Sep and Oct, resulting in £346.4m of sales of long gilts back to the market, following £480.5m of bids from GEMMs to the BOE.


    The most-bid and most-bought gilt was the 3.25% 2044 (£116.6m and £106.9m respectively) while the 1.4% 2047 and the 0.125% 2026 accounted for £125m or so of sold gilts. The Bank will sell these panic purchases every Tuesday, Wednesday and Friday until all £19bn of them are back in the market. At today’s rate of sale these extra market offerings will still be happening until the end of March.


    As for their market impact, on another day of reassuringly muted market volatility it was limited. Gilt yields traded in a pretty narrow range all day except when the BOE’s increasingly hawkish Catherine Mann popped up at lunchtime to warn about “increasingly embedded” UK inflation and the need to tackle it in a non-nonsense fashion.


    Those comments sent both 2y and 10y gilt yields scampering 5-6bps higher before slowly descending as the afternoon wore on, in spite of the BOE gilt sales later in the afternoon, and news that the 2027 and 2032 nominal gilt sales on Dec 6 will total £5.5bn. It just goes on and on and on.  


    Shortly after the 4:15pm close today the 10y gilt yield was -2.5bps at 3.09%, while 2s/10s steepened 2bps to -11bps and 10s/30s steepened 2bps to 26bps. In ASWs the 5y paused its downwards trajectory, widening 0.8bps to 70.9bps. Still, 10y tightened 2bps to 5.2bps and 30y was -1.1bps at -47.2bps  


    The 5y ASW has now contracted 26bps since hitting 97.3bps on Nov 3. RBC strategists today had a thankfully simple explanation for this, saying that the move “is consistent with, but probably understates, the tail-off we have observed in mortgage hedging flows in swaps.  5y swap spreads have fallen considerably from the wides despite still-tight repo conditions and the slowing pace of mortgage hedging (ie 5y paying) is certainly part of it…”


    It noted that “this morning’s mortgage approvals data for October were the softest since 2013, except for the early days of COVID.” Oct mortgage approvals came in at 59k from 67k the month before, ensuring that if ex-PM Truss is worried about not having a legacy, the looming property market crash seems sure to prove her pessimism misplaced.


    Over in linkerland, real yields were little changed today, breakevens were marginally tighter, and the RPI curve also a bit steeper, dipping 2bps in the front end and pushing 2bps higher in the long end.


    One novelty did appear in the RPI universe (apart from that very stable price action), with news of rare RPI-linked issuance by somebody who isn’t the DMO. But is Morgan Stanley. It sold a trio of self-led RPI-linked MTNs including £15m of 1.6461% due 29 Nov 2051, floored at 0%, £10m of 1.6531% due 29 Nov 2049, floored at 0% and £75m 1.6566% linkers due 29 Nov 2048, floored at 0%.


    After busy rollover, Tradition eyes the next 10y CTD

    A busy Mar-Dec gilt futures contract rollover, which saw five gilts exchange the yellow jacketed status of being the CTD at any given time in the run-in to the rollover which has now reached its course.


    But with that race now largely run, market research from brokerage Tradition looks to the next CTD debate. It notes that “the minutes of the DMO meetings with GEMMs and investors last night showed, as has been generally anticipated, wide support for a new 2033 (nominal gilt) issued next quarter and in time to be deliverable into the March contract (10 business days before first notice day which is Feb 13th).”


    It said that “the new bond will be CTD; on current valuation (with a 3.25% coupon), it would hold that position even as far as -6bp to S33. To be clear, in reality the bond will not trade against the green 33s, they are not the most liquid bond in the area, but for the sake of consistency we have quoted them that way but they should be valued taking into account the entire basket.”


    “On the basis that volatility is falling and the market is a little more liquid than it was a couple of months ago, we would suggest that the new issue premium the market demands is lower than it was. At +4bp to S33 (+5.5bp to 4H34), the bond is CTD by a considerable distance, about 80p. This status as an almost dominant CTD reduces net basis. Also, as has been pointed out… the weight of supply coming up over the next year(s) will push net basis lower than any option models suggest. 1%32 March net basis is currently around 120; New 33s at +4bp to S33 is a net basis price of around 35p. This might be a touch low, but not massively wrong taking everything into account.”


    New issues

    • NatWest has priced a £650m, 10.5y NC5.5 Tier 2 sub at gilts +420bps via BofA, JPM, TorDom and NatWest.


    • Vodafone today priced a £600m, 30y Dec 2052 bond at a 5.216% yield and gilts +180bps via BofA (B&D), NatWest and RBC. Book at £1.6bn.


    • Segro PLC has priced a £350m, 19y Dec 2041 bond at gilts +175bps via BoC, BNPP, Lloyds and NatWest (B&D).


    • Toyota Motor Finance is close to pricing a £400m 3.5y bond at gilts +160bps via Barclays, HSBC, Lloyds (B&D) and RBC.  


    • Investec has priced a £350m, 10.25y NC 5.25 Tier 2 sub at 9.125% and gilts +590.5bps. Books above £850m. Leads are BofA, Citi (B&D)and HSBC.  


    • Deutsche Pfandbriefbank plans a benchmark 3y GBP Green Bond via CS, NatWest and Nomura.