GBP Swaps: Mystery late rally; IL55 talk

Mystery late rally sees gilts outperform

While market commentators bickered about whether Hugh Pill’s latest dose of rate talk yesterday was dovish or hawkish, a placebo or the real thing, gilts were happy to move on. Today’s pattern wasn’t based on what someone might have said, or what someone else might say today, but the nitty gritty of supply and demand.

Yes, the eternal cycle of supply peddles on, with the DMO selling £3bn of Jan 2033s at 3.697% with the help of a notably strong 2.77 times bid to cover. They came at 3.697% and closed at 3.6775%, a satisfying sale for all concerned for the much-discussed former front-runner to be the 10y CTD. For now though, said research from brokers Tradition today, “the bond has traded towards the rich end of expectations leaving it in second place in the race for CTD behind F35 and ahead of 4H34."

This afternoon the BOE then piped up with its emergency QE unwind sale that left uncapped, ran wild. The market had £5.26bn bids accepted from £6.85bn received, and among the big take-ups in nominals were the 4.25% 2046 (£731.8m of bids accepted) and the 4.5% 2042 £728.5m. In linkers, the IL37 stood head and shoulders above its deflated peers, with a lumpy £485m of accepted bids.

But after all this supply, what would happen next. While Bund and UST yields continued on their grim upwards paths, gilt yields immediately started rallying in a last dash to the close. Suddenly that wadge of £731.8m of 4.25% 2046s at about 4.08% looked like a very handy bit of business at its 4.01%. It’s clearly… a miracle. One that the market fully enjoyed as the clock ticks very quickly now on this benevolent QT unwind structure.

Shortly after the close today the 10y gilt yield was 3bps higher at 3.53%, which was still a strong 4bps outperformance of Bunds and 5.5bps outperformance of USTs. On the curve 10s/30s caught the eye with a 7bps flattening to 35bps while 2s/10s was unchanged at 10bps.

In swap spreads the 5y was last +1.4bps at 48bps as the late gilt rally squashed a chance of another sharp tightening. The 10y was -0.7bps at -12.5bps and the 30y was +3bps at -52.7bps after ultralong outperformance in gilts. In linkerland, breakevens were +5bps to +9bps across the curve, while in RPI swaps the 1y was -11bps at 4.76% with the curve steadily steepening up to 30y which was +8bps at 3.32%.  

BNPP: Take profit on IL55 short

Strategists at BNP Paribas took a close look at the IL55, examining its value from a real yield perspective at a time of much supply, but also emergency supply unwinds. In summary, BNPP said that “we have long held the view that the unwind of the Bank of England’s temporary gilt purchases, alongside active QT bond sales and overall DMO supply, would provide a bearish context in the gilt market. Index-linked gilts are a particular sector of the market, largely focused on inherent pension fund demand.”

Therefore, “the inclusion of linkers in the emergency BoE purchases created a concern for us when the unwinds were initiated in late November. With IL55s being one of the largest holdings, in mid-November we entered into a short IL55 real yield trade idea. This has subsequently sold off the 57bp we were targeting and hence we are closing out the position for a profit. While we remain bearish overall on gilt yields, we now prefer to monitor market dynamics and would look to fade any strong rebound.”

BNPP recommends taking profit on its short position in IL55 by selling the IL55 real yield at 0.62%, having entered at 0.05%. After peaking at 65bps this morning the IL55 RY ended the day at 48.5bps.

New issues: BFCM

• BFCM today priced a £500m, 5%, Jan 2026 bond at gilts +170bps. Via BNPP and GS.