GBP Swaps: NFP bear-steepens; Lessons from the BOE's ops

BOE Threadneedle street Oct 2022
Strong US jobs data knocked gilts back today, more than reversing early gains and bear-steepening the curve.

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  • Bear-steepening after NFPs

  • Lessons from the BOE’s unwind operations: BofA

  • New issues


    Bear-steepening after NFPs

    A game of two halves for sterling rates today saw the gilt future initially outperform Bunds and Treasuries a touch ahead of the US employment report, before stronger-than-expected wage data bear-flattened the UST curve and sparked renewed gilt underperformance heading into the BOE’s latest unwind operation.


    Heading for the close the gilt future was near session lows and down 36 ticks at 105.18, having very briefly spiked to 106.95 just before the US figures. In cash, yields rose 8-10bps led by the long end, in contrast to the flattening seen in the other major curves. And although 10y gilts outperformed versus the wings, that was not enough to stop the spread to 10y Bunds edging wider again, to around 130bps.


    Gilts 2s/10s flattened to -14.9bps (-2.2) while 10s/30s moved up to 34.2bps (+3.9) and 30s/50s steepened to -31.9bps (+1.2). Asset swaps cheapened across the curve but led again by the front end with 5y around 4.4bps cheaper at 67.1bps versus a 2.3bps move in 30y and just 0.5bp in 50y.     


    The nominal gilt selloff and a rise in TIPS breakevens following the data weren't enough to prevent real yields from rising by 11 to 12bps, leaving breakevens 1-4bps tighter.   


    Lessons from the BOE’s unwind operations: BofA  

    Selling £1.4bn of bonds last thing on a Friday might have been made easier by the US selloff but the GEMMs also seem to be getting better at deciding where to put their bids (or the BOE is more comfortable following three successful operations this week) because today’s £1.4bn unwind saw the acceptance rate rise to 100%.


    It happened alongside a move away from linkers and towards nominals, in particular a skew in the direction of the £504m 3.25% 2044, the largest eligible bond in today’s BOE list. The Bank accepted all the bids for the bond even with yields up around 8.5bps since yesterday’s close – albeit due largely to the NFP data, rather than a clear and obvious concession.        


    It’s a small sample but, writing shortly before today’s BOE operation, BofA asks “what have we learnt” from the Bank’s first few unwinds.


    Given the “large” proportion of the emergency portfolio sold over the first two operations and the “high” fill rates of 74% in linkers and 90% in nominals (up again to 100% today), BofA judges that the BOE is keen to unwind its emergency purchases “quickly”. It continues:


      “We could easily see the Bank announcing later this month that the 'normal' active sales operations would continue to be shorts and mediums only through Q1, so that it is not selling long-dated conventional Gilts by two different and competing methods, perhaps with the aim of disposing of all the emergency purchases by end-March. This would make for a clearer and steadier supply picture beyond Q1, as the new fiscal year begins with what is set to be a demanding call on Gilt investors.”


    However, BofA adds the caveat that this week’s results may not be a fair representation of future demand.


      “Linkers represented about 40% of the emergency acquisitions by value before these sales, yet a surprisingly high proportion of the bids and fills were in linkers - the BoE sold £1.4bn linkers and £0.5bn long nominals (by value) over the first two days. It is quite likely this proportion was heavily distorted by index events, with this November being a landmark month for linker index extensions.”


    New issues

    • NIB yesterday priced a £100m tap of its 3y note 0.125% due Dec 2026 at 86.08 to yield 3.94%. Lead is Danske.