GBP Swaps: Gilts survive; Emergency QT smooth; CTD talk

Gilts survive supply blitz; Emergency QT smooth

Another day, another avalanche of gilt sales, and another reassuring victory for the leading market triumvirate – the GEMMs, the DMO and the BOE. Working through the activity today, a particularly heavy traffic day in this two-week caravan of non-stop gilt sales, traders said that all was smooth in a way unimaginable as recently as October.

Starting with the nominal issuance, the DMO banged out £3.25bn of 4.125% 2027s and £2.25bn of 1.125% 2039s. The 2027s achieved a decent 2.2 times bid-cover and having priced at 3.472% yield, and ended the day at 3.4275%. The Jan 2039 priced at 3.514%, with a bid/cover of 2.35 times, and closed around 3.53%.

Both rallied quite a bit post-auction before wilting into the close and one longstanding gilt market participant said that, in a nutshell, “the 4.125% 27s are one of the cheapest gilts on the curve. They are still at a spread of about 21bps to the 1.25% 2027 and (having launched in early October at a time of some difficulty for gilts) liquidity has been so bad for them that they are still trading quite cheap. The market cheapened into the auctions so they went pretty well.”

While the spread to its lower-coupon neighbour hasn’t changed today, the auction was normal enough to be deemed a success, while the 2039 sale was “fine, just fine,” according to the same source.

So nothing to see there and moving onto the BOE’s own gilt-peddling enterprise. It off-loaded £980m of linkers (it wouldn’t sell nominals so as to avoid competing with the auctions) today. They went off without a worry and the above source said that the emergency QE unwind that the BOE is busy with is a winning structure for the market. That dynamic will be reversed tomorrow when the DMO sells £750m of IL31s.

“Unlike regular auctions, you’re not going to put in a bid and miss out because there is a cap on the size of supply.  Clients have a guarantee in the temporary purchase sales – they can get what they want. So if, for example, the market’s fallen and you want £300m the GEMMs can cheapen the curve and make some money and everyone is good,” said the source. For this user-friendly reason, he said, the emergency QE unwind will likely be a swift and fairly frictionless process. Unlike the marathon that is the overall QE unwind plan…

Still, real yields rose 4-8bps at the close today led by the front end while RPI swaps narrowed by 3-7bps, echoing the tightening seen in euro and dollar inflation as oil lost $3.

Elsewhere, traders said that people looking for signs of supply pressure need look no further than the long end. The above source noted that “as recently as Nov 3, 5s30s gilts was +5bps, now it is +32bps. So the long end is where the pressure is.” 

Something to worry about in the months to come maybe - and the market underperformed Bunds and swaps across most of the curve - but, for today, gilt yields ended a little lower and the Autumnal rumours of the death of the gilt market as a serious place of business seem increasingly exaggerated. 

Tradition: Potential new CTD news soothes gilts

Following up on its look at the gilt CTD situation in gilts last week (see Total Derivatives), after a hectic period of revolving CTDs in volatile pre-roll trading, a strategy note from brokers Tradition welcomed the DMO’s Nov 30 announcement of a new 10y benchmark gilt to be sold next month.

Trads said that “the DMO announced issuance for the Jan-Mar 2023 period and as predicted included a new 2033 which will be auctioned on Jan 10th and very probably become CTD. By setting the coupon early (3.25%), the DMO have made the valuation of the March futures contract a little easier and the bond futures basis has settled a little.”

It adds that “4H34 have now become CTD given the unusual dynamics in the Gilt basket whereby the benchmark 10yr (as traded by the street) is not always the CTD. The set-up for BOE supply late last week put pressure on the benchmark 34s, pushing them down to CTD status. It should now stabilise a little at current lower levels.”