GBP Swaps: Nobody expects the Spanish inflation; Flatter after APF

Early sell-off on Spanish surprise fades; Ultra QT goes fine

The first £650m active QT sale of ultralong gilts from the BOE’s APF scheme hit the market this afternoon in successful style, albeit without a massive outpouring of demand. In a session during which strong Spanish inflation data that nobody expected was widely used as an excuse to sell fixed income on both sides of the Atlantic early on, albeit less in gilts than elsewhere.

Thus, the gilt that this afternoon had the most bids accepted (the 2071 with £235m of £337m bids accepted at 3.416%), rallied to test 3.38% in the wake of the APF results before coming back to 3.43% at the close.   

All-in-all there was little to suggest that consuming the QT event was a problem for the market with 10s/30s and 30s/50s off the flats but the latter down to -25.6bps (-1.7) at the close after steepening sharply through last week, raising hopes that selling the mere £843.7bn of gilts remaining in the BOE’s AFP should be little more than a formality.  

Elsewhere, the return of China to work after its week of holiday saw new issuance in global bond markets come alive again after a quiet five days. GBP was no exception with IBM returning like a still-impressive, if rusty and quasi-mythical, ghost warlord from pre-history, to raise £750m of 15y bonds in a deal that (despite IBM also peddling eight tranches of EUR and USD bonds today), attracted a very chunky £2bn of orders from awestruck investors at 115bps over gilts.

The AIB and AIIB also chipped in with a combined £850m of 2026 supply as 3-year SONIA swap spreads reflected the level of supply-related receiving interest with a 3.5bps widening to 65.5bps at the close, in a session that provided a highly active warm-up to the main central bank events later in the week.

In other swap spreads the 5y was +0.6bps at 47.9bps, 10y was unchanged at -10.9bps and the 30y was +0.6bps at -50.4bps, while the 50y, with that 2071 demand and long end flattening in mind, pushed 3.3bps less negative to -41.6bps.

Similarly, in gilts, the 5y and 10y yields, having cried their crocodile tears for Spain’s inflation situation in the morning, closed unchanged at 3.20% and 3.32% respectively.  Shorter in, SONIAs were down a modest 0.5-2.0bps in the whites before the MPC this week.

Barclays: 50bps MPC forecast but risks on dovish side

Strategists at Barclays today took a look ahead to Thursday’s MPC decision, and predict a with-consensus 50bps hike to 4%, with dovish risks. Barclays said that “We expect the MPC to deliver a 50bp hike at the February meeting – the last one of this magnitude – taking the Bank Rate to 4%, well into restrictive territory. The wording of the December minutes (said)… that the MPC would respond ‘forcefully’ if the outlook suggested more persistent inflationary pressures and that the Committee considered 50bp hike to be ‘forceful’.”

Barclays said that it believes that data and developments since then justify a final ‘forceful’ response, citing that:

• "Activity (H2 GDP) has been more resilient than expected, even though it is showing signs of further weakness ahead." 

   

• "The labour market remains tight as a result of the high levels of inactivity – with the latest data showing little signs of improvement – and the still-elevated number of vacancies. Furthermore, wage growth continues to accelerate." 

   

• "Core inflation remains sticky (6.3% y/y), driven by a further acceleration in services inflation (6.8% y/y), which came in well above expectations at the time of the November report and is the best reflection of domestically generated inflation."

   

• Energy prices have fallen further...While this should lead to a mechanical downward revision to the Bank’s headline inflation forecast, it should partially boost core inflation as the improvement in households’ real disposable incomes supports demand in the medium term.

Looking at the vote breakdown Barclays said that “The decision is unlikely to be unanimous, with a majority of seven members this time – including external member Mann – probably casting their votes for 50bps. Given Prof. Tenreyro and Prof. Dhingra’s concern that the sizeable impact from past policy tightening is still to come through… we think that they will continue to prefer leaving the Bank Rate unchanged, as they did at the December meeting. Risks are tilted toward a more dovish split.”

New issues:  ADB, AIIB, IBM

• The Asian Development Bank has priced a £600m, Feb 2026 bond at gilts +74bps via BMO, Deutsche and TorDom.

   

• The AIIB today priced a £250m tap of its 4.375% Jun 2026 bond at gilts +100bps via MS.

   

• IBM has priced a £750m 15y bond at gilts +115bps as part of a five-tranche bond issue consisting of 4y, 8y, 12y and 20y EUR supply, plus the GBP tranche via Barclays, BofA, Citi, Goldman (B&D), JPM, Mizuho, MUFG and TorDom.

   

• Kommunalbanken on Friday priced a £50m tap of its Dec 2025, 0.25% bond via Nomura.