GBP Swaps: Gilts underperform as shadow hangs over

Gilts underperform as shadow hangs over

A neutral start to trading today turned into a bullish one for global fixed income as weak US wages data allowed markets to turn a blind eye to a slightly higher headline NFP number (+223K versus +203K) and rally on the disinflation hopes the wages numbers raised.

Late in the session today the 10y gilt yield is 6bps lower as the market lagged rallies in 10y UST and Bund yields in excess of 10bps. The reason for the slight underperformance, say traders, is the long, long shadow cast by GBP supply factors that mean stands it out from other core bond markets.

One swapper at a leading GEMM said today that so far this week the gilt/IRS market “has been trading in a super-technical way. Among other things a big lump of swapped issuance earlier in the week saw ASWs come down a lot in the issuance areas.”

After a pretty quiet final quarter in GBP non-government supply due to some slight volatility stemming from Downing St, this four-day week has seen £3.2bn of 3y, £2.95bn of 5y and £1.6bn of 7-8y issuance from SSA and FIG borrowers.

Alongside this came a long-awaited £3.5bn Jan 2027 gilt sale yesterday, whose hasty pre-hedging was credited with providing some of the downwards pressure on shorter ASWs (see Total Derivatives), which have noticeably stabilised since it priced yesterday.

While traders are loathe to read too much into the consequences of the first truncated week of 2023, the above swapper said that the dominant theme is never far away from the market’s collective consciousness.

“While the market’s been pretty firm on balance this week (10y yields are about 20bps lower than where they finished off  2022), the UK is very sensitive to the supply calendar from the DMO and BOE, and that’s not going away,” he said.

With the help of that US data today that hidden burden was only evident in the gilt market’s underperformance versus the Bund and UST markets but next week, and every week after that for a long time the pressure will keep dripping and dripping and dripping.

For now though, the pressure on 5y swap spreads has at least eased after their vertical drop in the first couple of days of this year. Although the forecast of an 8% house price drop in 2023 by the Halifax today hints at further pressure on short-dated ASWs (for more see Total Derivatives). The 5y ASW was last +0.1bps at 50.5bps today, 2.5bps up from its recent low on Wednesday. The 10y ASW is currently +1.1bps at -9.2bps and the 30y is -1.1bps at -54.3bps.

On the curve there was a steepening move led by a sharp front-end rally where short sterling was +5 ticks in the front-end and +10 ticks in the long end in a rally largely fuelled by the US wages data. RPI swaps were down 10bps in the 1y at 5.07%, dwindling to -4bps in 30y as falling gas prices - Netherlands futures were down 4% today - continued to exert their influence on short-dated inflation.

New issues: CS, Santander

• Credit Suisse last night priced a £500m, Mar 2026, 7.75% bond at gilts +425bps via itself.  

   

• Santander yesterday priced a £1.5bn Covered FRN at SONIA +65bps via Barclays, Lloyds, NatWest, Nomura, Santander (B&D) and TorDom.