GBP Swaps: EGBs drag gilt yields higher; MPC, QT talk

Rolled flat 21 Jun 2021
An extended post-ECB sell-off in Bunds spread to gilts today as the curve bear-flattened, aided by some firmer PMI data.

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  • EGBs drag gilt yields higher

  • BNPP: Tests loom for long gilts and front-end ASW trend

  • Barclays: Data drives downside risk to peak forecast


    EGBs drag gilt yields higher

    EGB yields continued their surge higher in the wake of yesterday’s hawkish hike/leaks by the ECB, dragging gilts – which yesterday outperformed Bunds by 20bps – with them. Currently 10y gilt yields are coming back but still broadly matching the move in Bunds by rising 12bps to 3.36% as the gilt curve bear-flattened by 1bp in 2s/10s and by as much as 5bps in 10s/30s.


    As expected, volumes are moderate in what most market participants consider the first day of the Christmas period proper, now the central banks have done their business. Despite the attraction of a long Christmas lunch, SONIA futures have pared losses but remain as much as 15 ticks off in the reds - and 18bps in the greens - while implied market pricing for the MPC rate peak has popped back up to around 4.70%. Stronger-than-expected Services and Composite PMI data has also weighed on the front-end this morning, offsetting weak but upwardly-revised UK retail sales data.


    With Bund yields up 25bps or so since yesterday’s ECB headlines hit the screens  gilts have not been able to resist their traction today despite an absence of major news so far. In swap spreads so far today the 5y continues to wend its way lower, dropping another 1.9bps to 58.5bps (for more on front end ASWs, see BNPP below), while the 10y is -0.4bps at -4.6bps and the 30y is +1.5bps at -48.6bps. RPI swaps are +1bp in the front end and +5bps in the long end.   


    Ahead, the market awaits the BOE's QT market notice at 6pm today.


    BNPP: Tests loom for long gilts and front-end ASW trend

    Reflecting on yesterday’s 50bps MPC rate hike and the challenges ahead, BNP Paribas's strategists focussed on the looming QT calendar. It said that: “We look for an increase in the pace of QT gilt sales, reflecting a likely quarterly run-rate of GBP13bn. Furthermore, we expect the inclusion of the long-maturity bucket (over 20y conventional gilts) in the active sales process (to align with the original stated methodology).”


    In the front end BNPP notes that “the combination of reduced rate-hike expectations over the medium term, alongside the ongoing active QT gilt sales process, has allowed rich front-end gilt swap spreads to tighten somewhat....This gathered pace from the early November MPC meeting but has seemingly stalled recently. In our view, this reflects the reality of the QT gilt sales results and the glacial reversal of strained free-float levels for certain gilt issues. The upcoming announcement on the restart of QT gilt sales in January could define whether the tightening has any further to go ahead of the year end.”


    Barclays: Data drives downside risk to peak forecast

    Reflecting on yesterday’s hike, strategists at Barclays said that while they see no change in the pace of tightening at the next MPC meeting, the balance of risk after then points to a lower peak than currently forecast.


    It said that despite the dovish sheen offered by the two ‘no change’ voters, “unless wage growth moderates sharply and quickly and slack in the labour markets increases fast, we doubt the majority of the MPC members will vote differently in February.”


    “We continue to forecast two further hikes, one by 50bp at the February meeting and one by 25bp at the March meeting, taking the terminal Bank Rate of this tightening cycle to 4.25%, below current market pricing of 4.6%.”


    However, it cautioned, “the  risk could be that if data deteriorates faster than expectations, the MPC could slow the pace of hikes to 25bps as soon as the February meeting. But, for now, we think the bar for the majority moving in this direction is high and mainly dependent on the evolution of labour market data in our view, the outlook for which we think will keep the central bank hawkish. In particular, developments in public wage negotiations will matter, where there is a risk of larger increases than currently offered materialising to stop a wave of strikes planned for January.”


    In conclusion though it said that “We think the MPC will end the current tightening cycle with a 25bp hike in March as, by then, the effect of monetary policy on the economic and inflation outlook will have more meaningfully emerged, due to the lags with which monetary policy impacts the economy and the sizable cumulative tightening done in this cycle.”