Basis calm for year end; Gilts reveal trepidation in seasonal trading

Long end gilts reveal trepidation in seasonal trading; Basis calm

It says a lot for how the understanding of what is normal has shifted over the last year that a day which begins with Russia launching missile attacks on the major cities of Europe’s largest country (after Russia itself) does not warrant any semblance of a risk-off move in any of the major global bond markets.

Instead, hardened against news that would have been unimaginable in recent years, those markets have gently sold off again today, led once more by gilts which have eyes only it seems for events in their narrow sphere of influence, most particularly a 2023 loaded with a barrage of DMO and BOE issuance ready to rain down on overwhelmed sterling bond investors.

The cloud of supply looms particularly darkly over the long end, which has been shielded from much of the recent spike in issuance activity, but won’t be from now on. There we have seen the 30y benchmark top 4% yesterday, for the first time since The Madness in October, before rallying back.

Today it looks to be making another run to the 4% level, rising 6bps from last night’s close to 3.98%, steepening 10s/30s gilts by 1bp to 28bps while 2s/10s is also 1bps steeper at 9bps. The bigger contrast is against the strip where MPC expectations remain the driving influence, and amid the most minimal of flows, the strip is largely unchanged again today.

Swap spreads are lightly reflecting higher gilt yields with the 5y down 1.3bps at 53.9bps, 10y is -0.5bps at -11.4bps and 30y is -1.2bps at -50.7bps. And in linkerland, which was one of the first market’s to down tools for Christmas back in early December after the most drainingly dysfunctional of years, breakevens are mostly unchanged while RPI swaps are +3bps in the front end and +1bp in ultralongs.

Elsewhere, and cross-currency basis traders have mostly been saying this month that USD liquidity remains sufficiently high levels as to offer little risk of the kind of year-end fireworks that in some recent times have sent the first breaks in core cross-currency spreads plunging to, or near to, minus 100bps.

After a drop at the end of calendar Q3 following a very strange period in UK politics caused cross-border nerviness, the first breaks have been steadily clawing back that move through the Oct-Dec period. That clawback was finally completed today with 3m EUR/USD jumping 5.125bps to -19.375bps, pulling it above the -23.5bps level from which it plunged nearly 50bps on Sep 28 for the first time since that fall.

Elsewhere the moves in EUR/USD are lightly mixed, fading out completely by the 30y point which was unchanged at -18bps. Cable (where 3m is little changed at -4bps, about 5bps off its Sep 28, pre-plunge level) saw less movement, with no points of the curve shifting significantly today, while JPY/USD has also had a calm progression through its year-end turn. SDR data (link) shows a smattering of basis trades as year-end nears. 

Currently 3m JPY/USD is up just 0.625bps at -34.75bps, just a bit below its pre-plunge level of about -29bps, having ground its way up from an early October low of -77.75bps, while moves along the JPY/USD curve are again lightly mixed.   

Bund yields edge higher; Inflation steady before data   

A lacklustre session in euros saw the 10y Bund last around 2.51% (+2bps) while the EuroStoxx was trading +0.2%.

Back in today’s market, the short-end has seen a small bounce with Euribors trading up to 4bps higher albeit in small volumes of less than 20k in the red contracts and 70K in Mar23. Across the swap curve the direction is slightly steeper with 2s/5s at -18.5bp (+0.5bp), 5s/10s at -4.2bp (+0.5bp) and 10s/30s at -67.3bps (+0.2bp). Bund asset swap spreads are being marked 0.25bp to 1.25bp tighter, led by the long end of the curve. 

Ahead, the market could see more activity when December's inflation prints begin to arrive on Friday with the Spanish CPIx consensus at 5.8%yoy, down from 6.7%yoy the previous month.

Before the flash inflation releases, EUR 1y inflation swaps are +0.5bp at 4.50% today and 2y are up the same at 3.39% against the backdrop of a slip in WTI futures to $82.3, down a dollar, and a 3.6% rise in front gas futures back to €84.3. EUR 1y inflation peaked this month at 4.94% before forecasts of flash German inflation were cut as the potential impact of household energy subsidies were belatedly incorporated into expectations for the December euro HICPx fix. The current Bloomberg consensus for flash German HICP (the data is due on Tuesday 3 January) is -0.6%mon/+10.5%yoy but Morgan Stanley, for example, forecasts a much lower 9.1%yoy outturn on the back of energy, and BNP Paribas looks for 9.8%yoy.

UST market awaits 7y auction and year-end  

Risk assets are in the green today led by a 0.6% gain in Nasdaq futures. However, that still leaves the index on track for a loss of around 34% for 2022, with the S&P down around 20%.  

In rates, Eurodollars are +2bps for Mar23 but unchanged in the reds while UST yields are a bp lower with the 10y at 3.88% ahead of today’s initial claims data (seen rising 9K to 225K) and a $35bn 7y auction. Yesterday’s 5y sale was covered a near-average 2.46 times with a short, 0.8bp tail.

In the news, Bloomberg reported that usage of the Fed’s reverse repo facility jumped by $72bn yesterday to a near-record $2.29trn as year end looms. Meanwhile swap spreads are tighter with 5s at -24.50bps (-0.75) and 10s at -32.125bps (-0.50). Shorter in, first IMM FRA-OIS has tightened to 14.7bps (-1.0bps) and the second IMM spread is steady at 19.9bps (+0.1).

New Issues 

• Lower Saxony plans to sell EUR 10y benchmark in the near future through DB, DZ, JPM, LBBW and NordLB.