GBP Swaps: Glorious summer to follow winter of discontent?

Glorious summer to follow winter of discontent?

As strikes spread like warm butter across the nation and Britain braces itself for its coldest winter of discontent since 1978/79, one senior GBP swapper looks ahead to what might be in 2023, which after 2022 is not a topic for the faint-hearted.

But first, the semi-serious day before Christmas and probably year-end was book-ended between UK and US data. The above trader said that revised GDP data that came in weaker than expected this morning supported a strong start to gilts, particularly in the front end, that faded during the day as 10y yields ambled 10bps above their lows and 2y yields trudged 8bps higher.

After that though, US GDP came in just marginally stronger than forecast and this was a sign for the market to breath a sigh of relief, start the final Christmas planning, and for yields to fade in a southerly direction.

The above swapper said that “there was a bit going on this morning but then the US data came out and after that things pretty much just stopped. Tomorrow is a half day and from here it’s all about shopping and Christmas.”

And after that New Year’s Eve and 2023. Looking beyond this miserable year, the trader said that “the most positive thing I can say about gilts next year is that this year as so horrific that the market starts in a position where there is at least space to rally. This year started with front end yields at 50bps (in 2y, versus 3.63% now) so there was nowhere to rally to."

“Next year,” he said, “the market is at least capable of moving in both directions. The answer as to which direction will be down to supply and geopolitics. Supply-wise the gilt market is as usual well-briefed on the outlook and has the opportunity to price in increased gilt issuance. The difference though this year is the issuance size is so huge that it might be hard to accommodate for it even when forewarned.”

“As for the global politics, they are more unstable than at any time since the fall of the Berlin wall. Russia and Ukraine have been bad enough for global markets but we are seeing riots in China and any instability there would be many times worse for markets than even what we’ve seen so far this year.”

And, he added, “there’s the UK. The last winter of discontent led to a huge shift in the political landscape (Thatcherism and a Labour Party led by Michael Foot). So we will have to see if the UK’s problems will escalate or fade away.”

So, everything to play for next year, but don’t be sure that just because this year was terrible, next year is destined to be better.

Approaching the end of trading today, the 10y gilt yield is +2bps at 3.59%, 2s/10s has steepened 6bps and 10s/30s is unchanged. In swap spreads there are very modest moves with the 5y +0.2bps at 54.7bps, 10y is +0.1bps at 7.7bps and 30y is +0.5bps at -49.3bps. And in linkerland 5y B/Es have popped 11bps wider with the curve flattening gently down to a 4bps move in 30y.

Property another focus for 2023

With front-end ASWs being one of the wilder movers in a wild year, short gilt/ASW traders will be keeping a wary eye on developments in the property market, where mortgage hedging is such a driver of 2y to 5y ASWs.

Strategists at RBC are very aware of this so today highlighted the latest views from Zoopla, which sees the UK property market returning to old patterns, but in a downwards direction.

RBC highlights the following thoughts of Zoopla, noting that “A key trend over the last 2 years has been the search for space. A proportion of buyers have looked to relocate to rural and coastal areas, pushing up demand and house prices more quickly than in other areas.

The initial wave of pent-up demand was brought about by more working from home and a spike in retirement. This looks to have run its course for now, as the coastal and rural areas are offering less value for money and there are fewer discretionary-motivated moves from cost-conscious buyers”

And in terms of the current data, things are deteriorating faster than some expected. Zoopla said that “sellers are on average accepting a 4% discount to asking prices, compared to 0% in October. Zoopla expects house prices to fall over the next two quarters with absolute price levels being a key factor in how far they fall. Zoopla’s data base shows a strong link between affordability and house price performance over the last five years…”