GBP Swaps: Gilts lag again as DMO sells; FSGP views

Market 25 Nov 2021
Gilts lagged their peers again today with supply from the DMO to digest rather than the BOE. Banks tweak their BOE FSGP views.

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  • Gilts lag again as DMO sells, sterling gains

  • Take steepener profits, look for gilt underperformance: Banks

  • New issues: Deutsche PBB


    Gilts lag again as DMO sells, sterling gains

    The BOE’s bond stall was closed today but DMO’s was open again to allow the giltmongers of Mincing Lane to offer £2.25bn in 2051 bonds to the market. Auction bid to cover was an acceptable but unspectacular 2.1 and the sector lagged on the curve. Indeed, the gilt market as a whole lagged and failed again to keep up with Bunds, with the result that the simple 10y spread to Germany widened by another 5bps to 128bps as the gilt future gained 70 ticks.


    10s/30s gilts steepened by 3.5bps and 30y underperformance was also reflected in around 3bps of flattening in 30s/50s, helped by 50y richening on asset swap.


    In contrast, 30y asset swaps cheapened by around a bp while shorter in, 3y asset swaps tightened by 4bps on the screen as Deutsche PBB priced a £350m Green bond and SONIAs rallied with Eurodollars as the latter extended their post-Powell gains.


    Meanwhile sterling’s strength against an increasingly peaky dollar saw cable rise two cents to 1.22, which should cheer up the BOE’s hawks by helping to (partially) offset recent gains in Brent and gas futures (although the latter fell 7% today).       


    Finally, real yields fell by 4-10bps led by the front of the linker curve while the long end just about kept up with the rally in nominals, even after the BOE yesterday sold plenty of linkers (into month end) and with £700m of IL31 supply on the calendar for next week.


    Take steepener profits, look for gilt underperformance: Banks

    The start of the BOE’s FSGP unwind is an opportunity for strategists at BNP Paribas to take stock of previously recommended positions, including a 10s/30s steepener and a front end asset swap flattened. They recommend taking profits on the former and cutting the latter at a loss, as they explain:


      "While the process (of the BOE unwind) is demand-led, and hence the overall impact of the sales should be mitigated, the fact that the BoE is likely to want to remove these temporary holdings over a relatively restricted time period, in our view, points to supply pressures, notably at the long end of the curve.”


      “The 10s30s curve has indeed seen a steepening move, taking the UKT 1’32-0f50 up to touch our target level. Given that we now wish to be more selective in expressing long-end steepening (looking further out on the curve), we close this trade at the target level of 15bps.”


      “(In addition) we favoured a matched maturity swap flattener (2% 2025/0% 2026 gilts), driven by the unwinding of the richness in repo for the bond sectors that were in the active sales maturity buckets, especially the 2026 sector. While initially there was some positive movement as the first QT gilt sales event occurred, thereafter there has been a very significant resteepening.”


      “The over-arching reassessment of the BOE’s trajectory, and the sharply reduced hawkish path over the near-term horizon, has seen swap rates sharply outperform yields, especially in the 2025 sector, causing a greater reduction in the swap spread in this sector than the slow active sales momentum delivered for the 2026s.”


    Elsewhere, RBC also mulls the market impact of BOE + DMO supply and recommends positioning for 20y sector outperformance, “post the 1e39s auction next week” and looks for the 2051 gilt to outperform on RV over the next few weeks.  RBC continues:


      “With the BOE selling long conventional gilts 3 times a week over the next 3 weeks from its emergency sales programme, we continue to favour an underperformance of gilts cross-market, a marginally steeper curve and cheaper long-end ASW spreads. Although it is worth noting that on each of these metrics, the sector has cheapened over the past 7 (now 8) sessions.”


    New issues Deutsche PBB

    • Deutsche PBB today priced a £350m 3y Green bond (BBB+) at 7.5% through CS , NatWest (B&D) and Nomura.