GBP Swaps: RICS reverses 5y ASWs; NatWest sticks to 75bps hike

RICS reverses 5y ASWs; Post-APF bounce

A lack of obvious drivers, apart from supply and demand dynamics, left gilt yields to drift higher then drift back again in a listless market that broadly tracked USTs and Bunds as gilts bear-steepened in a low-volume session.

As for that supply and demand dynamic, in the APF event today, a strong bid/cover of 2.66 times saw the BOE sell the standard £750m of 2030-2042 gilts. The star of the show today was the 4.25% 2032 which lured in £854m of bids, with £554.6m of those bids filled and then rallied 6bps in the wake of the emergency QT sale. As the close approached the 2032 was close to finishing the day little-changed after the earlier 7bps sell-off immediately prior to the BOE sale.

So it has been yet another good performance by those charged with the task of keeping the good ship Britannia afloat, and if the market can keep this going through the final few days of the marathon of consecutive supply sessions, it might start the year better-minded to face the looming long-term supply mountain.

With a rare lack of shocking international headlines the market was allowed the luxury of focussing on domestic data which today consisted of the stark drop in the RICS house price expectations survey.  RICS reported an alarming -25% balance for November, the lowest since Covid hit in early 2020, down from a previous -2% and a forecast -10%.

'Geronimo’ seems to be the word in the UK housing market, as it has been in the front end of swap spreads since the start of November when 5y swap spreads were 95bps.

Today they fell 3bps to 64bps, more than reversing yesterday’s bounce, and an RBC strategy note today commented that “it is transaction volumes rather than house prices that matter for swap spreads and the RICS data underlines our view that the dearth of mortgage hedging in swaps is - and will continue - contributed to the slide in 5y swap spreads.”

RBC sees further tightening of front-end swap spreads from their current, still-elevated levels.

Elsewhere in ASWs, while the 5y tumble was aided by a late push lower, the 10y ASW ended the day unchanged at 3.7bps and the 30y was -0.6bps at 54bps. SONIAs rose 3-6bps in the reds and most of the greens.

And moves on the gilt curve were excitingly undramatic, with 2s/10s -1bp as 10y gilt yields closed +5bps at 3.09%, while 10s/30s steepened by another 1.5bps to take the move over the last week to 11.7bps.

Linkers were a bit softer, with real yields rising 11bps in the ultralong long end and 5bps in the front while B/Es fell 3-5bps on the day. 

NatWest: Close call, but 75bps hike seen next week

Describing it as a “very close call between 75bps and 50bps” strategists at NatWest continued today to opt for a 75bps hike next week when the MPC has its final 2022 get-together.

Explaining its reasoning, NatWest said that “With the two doves, Tenreyro and Dhingra, warning about excessive tightening risks, a majority for 75bp in December appears to lie with Governor Bailey and Deputy Governors Broadbent and Cunliffe – all three voted for +75bp in November and all three rarely dissent from the majority.”

And looking at how to trade from here, NatWest says "we continue to think that markets are overpricing BoE action in 2023. It is not necessarily the terminal rates that markets are pricing, but more the timing of the peak (the market prices in rate rises until September). A higher rate hike than markets are expecting next week (i.e. 75bp not 50bp) should not drive a significant re-pricing (higher) in front-end expectations, especially if the BoE deliver this as ‘front-loading’ of the last few hikes in the cycle, rather than larger hikes to reach a higher peak."

Therefore, it concluded, "We like receiving Jun MPC-dated SONIA. Longer-dated rates should be driven much more by QT decisions (on Friday, we expect longs to be included in Q1) rather than Bank Rate decisions (on Thursday). QT and high issuance next year should weigh on longer-dated yields: continue to target 4.3% in 10y gilts."

New issues: BMO

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