GBP Swaps: Shock as linkers sell-off pre-auction, then rally

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This week of a thousand gilt sales continued today with emergency QT unwinds and a spooky linker auction. BNPP eyes QT in 2023.

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  • Shock as linkers sell-off pre-auction, then rally

  • BNPP: 50bps hike eyed; One ‘no hike’ vote; QT to run at £13bn per qtr

  • New issues: BMO, Volvo


    Shock as linkers sell-off pre-auction, then rally

    This week of a thousand gilt sales continued today with another emergency QE unwind offering in long nominals from the BOE in the afternoon, and before that a sale of IL31s from the more familiar faces at the DMO.


    The IL31 auction was £700m in size and seems to have benefitted from the BOE’s decision to sell linkers yesterday so as to avoid a clash with a busy day of nominal supply from the aforementioned DMO. But one seasoned inflation trader said this afternoon that there was one slightly shocking aspect to today’s sale.


    “It went well,” he noted, adding that “very unexpectedly linkers sold off going into the supply, then the market bought the bonds, and then it rallied as a result. Which is unusual.”


    The green shoots of functionality seem to be springing out everywhere in the gilt multiverse at the moment, after a very weird six months. Looking further into today’s sale, the senior trader said that “it basically went pretty well, the cheapening helped and that in turn was assisted by the BOE’s sale of linkers yesterday.”


    The IL31 attracted a hearty 3.4 times bid/cover and cleared at -55.8bps, having hit -50bps prior to auction and rallying neatly to -60bps in its wake. It was last at -59.5bps and the 10y linker breakeven is presently trading at 3.72%, +3bps. The above linker trader said that the post-auction performance was supported by the relatively modest size of the sale, while the buyers included “fast money, along with the usual client base.”


    The trader added too that a rise in gas prices as temperatures in Europe drop supported the front end of the inflation curve today, “and people like to pretend the IL31 is the front-end so that might have helped.” But beyond that the inflation market was calm to the point of boredom, the trader noted. “It feels like Christmas trading conditions now,” he said with ill-disguised relief.


    In the front-end then, 1y RPI is +2bps at 6.49%, (10y is +1bp and ultras are +2-3bps) while in cash B/Es the 50y is a slight outlier with a 4bps bounce to 3.07%.


    Meanwhile, linkers’ nominal gilt siblings were indulging in a bit of steepening as the BOE sold its emergency longs, but nothing too dramatic was happening with 50y again the outlier, +6bps at 3.00%, while the 5y is -4bps at 3.18% and the 10y part of the curve saw yields edging 2bps lower to 3.05%. ASWs were mixed with the 5y holding the line for once to be +2.6bps at 65.7bps,  the 30y is +0.1bp at -54.5bps and 50y is -1.9bps cheaper at -44.4bps.


    The 10y gilt is matching moves in Bunds but underperforming USTs, which are -8bps in a sharp reaction to helpful comments from Vladimir Putin who noted that the risk of nuclear war is growing. Thanks for the warning, but the gilt market appears to have taken the view that if it can survive the Truss mini-era, what’s a few badly-made fireworks to worry about?


    As for those BOE gilt sales today, it managed to offload £1.718bn of longs ranging from the 4.5% 2042 and the 1.625% 2071. The total sales were pumped up significantly by £860.2m of bids for the 2047s, all of which were accepted. In the wake of the emergency operation unwind sale, long and ultralong gilts have rallied slightly amid little in the way of volatility.


    BNPP: 50bps hike eyed; One ‘no hike’ vote; QT to run at £13bn per qtr

    Looking ahead to next Thursday’s MPC meeting, strategists at BNPP predict a 50bps hike, a significant first vote against a hike (probably Catherine Mann) since the BOE started raising rates, but any bullish impact of this will, it believes, be tempered by less dovish wording from the MPC team than was the case at their last get-together in November.


    Also on their to-do list will be the path ahead for QT in 2023. BNPP: says that: “Aside from the guidance around policy rates, next week (albeit likely on 16 Dec) the BoE is  set to announce the schedule of active sales restarting in January, following the last QT active gilt sale of 2022 on 8 December.”

    Importantly, it says, “as yield levels have predominantly reversed the post mini-Budget spikes, we see the BoE moving to include the long maturity bucket, as originally stated, in the active sale process, with the amounts equally distributed in cash terms.”

    BNPP recalls that “the volatile environment as active sales were about to begin led to a notably smaller amount of sales since the start in early November. This implies a marked step-up in the pace of sales starting in January as the stated aim of reducing the balance sheet by around GBP80bn over 12 months, when adjusted for known passive roll-offs, points to a GBP13bn per quarter run rate.”

    Separately, BNPP says the sales of the BoE’s temporary purchases is scheduled to carry on until a scheduled pause between 19 December and 6 January. This process is likely to continue in January if holdings remain.


    New issue: BMO, Volvo

    • Bank of Montreal is close to pricing a £1bn,  3y, SONIA +65bps Covered FRN via Barclays, BMO Capital Markets, Lloyds, NatWest and Santander (B&D).


    • Volvo Treasury has priced a £250m, Jun 2026 4.75% bond at gilts +170bps via HSBC.