GBP Swaps: QT solid as gilts outperform; Supply storm is coming

Gilt edged
The gilt market got a historic week of supply off to a good start, with help from the MPC's Dhingra. Supply is never far from minds today though.

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  • QT solid as gilts outperform

  • Barclays: Looking ahead to the calm before the supply storm

  • New issues 


    QT solid as gilts outperform

    The immersion of the gilt market into a world of total supply saw its first ever five day week of daily gilt sales kick off with the ever-popular Monday front-end gilt QT sale garnering a bid/cover ratio of 2.43 times as the market snapped up £750m of 2026-2029 gilts from the BOE’s own private collection.  


    The 0.375% 2026 gilt was both the most bid (£510m, narrowly ahead of the 1.25% 2027) and most sold (£393m), and after peaking during the sales process at 3.26%, it closed at 3.21%.


    The front-end auction was therefore warmly welcomed by a gilt market that was happily out-performing core rivals on the back of the MPC’s Dhingra, who sensibly pointed out that higher rates will deepen the nascent recession, prompting suspicions that she, for one, won’t be voting for a hike at the MPC meeting in ten days' time.


    The 10y gilt yield ended the day at 3.09%, a valiant 6bps lower on the day, having bottomed out at 3.06% at lunchtime and hitting the heights at 3.14% after US data that sent Bunds into mildly negative territory and 10y USTs 6bps higher in yield at the time of writing.   


    It was a more than solid start to a potentially trying week for gilts in which the challenges posed by supply are likely to grow incrementally. Neatly summarising the historic (in terms of consecutive events) week of supply, NatWest strategists noted that this is “another week of three temporary QT auctions, which means the BoE will be coming to the market every day this week. Note that these auctions will continue for another week (unlike regular QT), before pausing for Christmas and re-starting again in w/c 9th Jan.”


    So there will be some respite before what promises to be a very challenging burst of heavy supply in 2023, 2024, 2025 etc etc.  But for this week, as well as the last two hurrahs of QT for 2022 (today’s one and the 7y to 20y event on Thursday) there are three DMO auctions on Tuesday and Wednesday, consisting of a £3.25bn 4.125% 2027, £2.25bn of 1.125% 2039s, and £700m of IL31s.


    Shortly after the close of play 2s/10s flattened 3bps and 10s/30s pare early steepening to flatten back to unchanged, ending a soggy run for the long end.


    In swap spreads the 5y was last -1.7bps at 65bps, 10y was -1.3bps at 2.9bps and 30y was -2.6bps at -52.5bps. Breakevens ended the day flat in the front end, -2bps in  10y and -4bps in longer maturities, while the once-wild 1y RPI was tame as a kitten today, as it gamboled 6bps higher to 6.53%, making it the peak of a mild flattening move.


    Barclays: Looking ahead to the calm before the supply storm

    Before a very heavy year of gilt issuance in 2023/24, when strategists at Barclays predict the gross financing requirement will rise to £305bn from £210bn in 2022/23, there is, it notes, a pretty heavy quarter of issuance to get through when the final quarter of this year commences.


    At the start of a unique week of supply it seems appropriate to look ahead at what else is coming the market’s way, and compared to longer-term expectations, it looks almost benign. Barclays says that “we estimate that the DMO has about £50bn of gross financing in Q1 23 to complete its issuance program for FY22/23.”


    The good news though is that “with a £34bn redemption in January and £10bn of coupons being paid over the quarter, the net cash call from the DMO alone is only about £4bn for Q1 23. To this, however, we should factor in active gilt selling from the APF. The Bank has said it will publish an auction schedule for Q1 23’s APF selling operations on 16 December.”


    Barclays says its working assumption is that active sales will be about £4.5bn per month, a pace that would be consistent with an overall balance sheet reduction of £80bn by September 2023, the MPC current target date.


    “We estimate that APF sales will add a further £13.4bn to gilt supply over Q1 23, only marginally less than our expectations of £16bn net supply from the DMO. Once adjusting for coupon and redemption flows, it leaves a net cash call from the market of £19.8bn, significantly lower than Q4 22’s £34bn. Clearly, any selling from the BOE’s FS holdings would push this number higher. But the BOE might consider saying that while it commits to the overall APF unwinds, it undertakes not to sell >20y issues from the APF’s holdings until it has sold more of its FS portfolio. That way, the Bank avoids the accusation of being a source of market disruption by selling bonds into the market from the APF when there is limited appetite for longs apparent from its reverse inquiry-driven sales.”


    New issues

    • TSB Bank on Friday priced a £250m, Dec 2026 NC3 SONIA +340bps FRN at par via itself.