GBP Swaps: F/E RPI and gilts suffer on BOE and data

Bank of England sign Oct 2022
Concerns central banks might step up their hawkish plans, combined with strong ADP data, condemned gilts to a week session. 5y ASWs stopped falling.

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  • F/E RPI and gilts suffer on BOE and data

  • New issues: CS, Pacific Life


    F/E RPI and gilts suffer on BOE and data

    Despite the eye-catching dip in French inflation (and the less impressive undershoot in German price rises) this week, wariness about future central bank action against inflation took their respective toll on gilts and the RPI market today as the mood turned bearish across both markets for the first time in this very young year.


    The 10y gilt yield closed +6bps at 3.55% while 2s/10s bear-flattened 2bps and 10s30s bear-steepened by 3bps as US data buffeted the wings. Stronger-than-expected US ADP Employment data this lunchtime added 6bps to both 2y and 30y yields during the remainder of the session as the suspicion stirred that the Fed’s hawks, vocal already this year, may be onto something.


    Meanwhile the influential BOE DMP business leaders survey today showed a rise in inflation and wages expectations over the medium-term and, in some strategists eyes, increased the risk that the BOE will hike by 50bps when it next gathers, versus the more typical recent expectation of 25bps.


    The prospect of a more hawkish BOE tone than had been forming as a consensus view last month fed into the inflation market as well, with the 1y RPI swap dropping 30bps (as 1y/30s steepened 30bps). Breakevens bear-steepened 15bps on a 5y30y basis, again reflecting concern regarding a more aggressive BOE stance.


    And supply returned today. The DMO sold £3.5bn of Jan 2027s at a yield of 3.665% and a bid/cover ratio of 2.18 times. The morning auction then drifted into a hostile afternoon for fixed income everywhere, ending the day 5bps higher at 3.715%. If there is a plus side to the gloomy turn in the market it is, traders have explained this week, that trading desks aren’t necessarily quite up to full speed yet, although gilt futures volumes have crept firmly above the 100K a day mark now.


    One small but noticeable move today was in the 5y ASW, which fell from 60bps at the start of the week to 48bps yesterday. It opened higher than that today but fell to 48.5bps at around the time of the 2027 auction, rushed pre-hedging of which had been blamed for its precipitous slide in the previous two sessions (see Total Derivatives).


    Since the auction it has pushed up to 50.4bps, 2.4bps higher on the day and a welcome move in a market that saw enough volatility to last a lifetime over the previous four months. The 10y ASW closed 2.3bps higher at -10.4bps and the 30y closed out -0.5bps at -53.2bps.



    New issues: CS, Pacific Life

    • Credit Suisse is on the brink of pricing a £500m, 3y self-led bond at gilts +425bps.


    • Pacific Life today priced a £350m, 5y, FA-backed bond via Barclays, DB and JPM. It came at gilts +155bps.