GBP Swaps: Opposing forces crush 5y ASWs; CTD talk

Gilt edged
The standout mover (again) in the reopened world of gilt and IRS trading today was the 5y ASW. Traders eye that, and supply. NatWest is bearish.

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  • Opposing forces crush 5y ASWs; CTD talk

  • NatWest: Here we go… our view for 2023

  • New issues: KfW, MetLife, SEK, Westpac


    Opposing forces crush 5y ASWs; CTD talk

    The standout mover (once again) in the reopened world of gilt and GBP IRS trading today was the 5y ASW, which started the new year as it finished the old year, with a sharp 9bps or so drop. Looking at the move one longstanding market participant said that two opposing factors were at work.


    “SONIA (where front end contracts were +2 ticks and longs were +10 ticks) is rallying following a similar strong move in Europe (Bund futures), and that’s encouraging receiving of front-end swaps, but gilts just don’t care about that.”


    And perhaps more significantly he noted that “there’s no way that anyone did any setting up for Thursday’s £3.5bn 2027 sale while they were heading out for Christmas.” So, he said, “the market’s got to set up for the 27s -- and it’s quite a big auction -- in a matter of a couple of days by receiving swaps or selling gilts. And they’ve received swaps… while gilts have done very little at all. So it’s not a spread move per se, just two factors pulling in opposite directions.”


    Looking at that auction of £3.5bn of 4.125% 2027s, he said that it was an interesting one. “The 4.125% is trading very cheaply versus neighbouring gilts. The 1Q 2027 and the 4.25% 2027 have very limited free float (because of BOE QE purchases) of 20-something per cent each which makes them very expensive on repo. The 4.125% has no BOE holdings so is very cheap on repo which is why they are much cheaper than their neighbours, so it could be an interesting auction.”  


    And looking to next week, and the auction of the new 3.25% 2033 gilt, the gilt market participant said that a lot has changed since the new gilt was first mooted. “Back in Sep and Oct when the market was busy dislocating it seemed certain that the new ‘33 would be the CTD. Since then though the market has had a bit of a comeback and stabilised, which has involved the curve steepening, and now the 2035 is CTD, with the 2033 the second.”


    So, the first couple of weeks of 2023 will throw up some interesting challenges for the DMO as it ploughs on with its marathon issuance tasks. Today though, was not madly interesting, said traders, despite the sense of shared joy that the disruptive Christmas holidays are finally over and another likely exceptionally busy year in GBP fixed income is underway.


    Shortly after the closing bell, the 10y gilt yield was -3bps at 3.63%, while 2s/10s bear-flattened 4bps to 9bps and 10s30s bull-steepened 2bps to 31bps. In ASWs the 5y closed down 9.1bps at 50.7bps, 10y was -1.8bps at -12.3bps and the 30y was -4.3bps at -52.9bps.


    NatWest: Here we go…our view for 2023

    Strategists at NatWest today published a summary of their expectations for this as yet fresh, unsoiled new year. In short, NatWest said that it recommends that market players:


    • "Fade any pricing of cuts in the front-end; expect Bank Rate on hold through 2023 (after peaking in March).

    • "For longer-dated rates, we continue to think that 2023 should be less about the BoE’s reaction function / global central bank expectations and more about funding the fiscal deficit and the associated record levels of net supply.

    • "The market is unlikely to be able to digest that supply without a significant cheapening, we think, particularly once you consider the BoE’s sales as well.

    • "We continue to target 4.3% in 10y gilts by mid-2023 and expect this to bring about curve steepening, and bond underperformance via swaps too.

    • "Expect gilts to underperform on a cross-market basis, particularly vs treasuries."


    ‘Bond bulls,’ they seem to be saying, ‘fasten your seatbelts.’


    New issues: KfW, MetLife, SEK, Westpac

    • KfW has priced a £1.25bn, Feb 2026 bond at gilts +81bps via Deutsche, HSBC and MS.


    • MetLife Global has priced a £600m, 5%, Jan 2030, gilts +150bps bond via Barclays, CS, Deutsche and RBC.


    • Swedish Export Credit today priced a £300m, 4.5%, Mar 2026 bond at gilts +105bps via Barclays, RBC and TorDom.


    • Westpac has mandated Barclays, HSBC, Lloyds, NatWest, RBC and itself to lead a GBP-denominated 5y benchmark Australian Covered Bond.