GBP Swaps: Can 76% of economists be wrong about the BOE?

SONIAs steady before MPC; 10s/30s steeper again 

The approach of the Fed and a pause in the busy pace of GBP IG issuance helped to ensure a tight range and lowish volumes today with the gilt trading around 173K as it headed for the close around 20 cents higher. Meanwhile the curve continued to steepen at the long end.

Sterling markets face their own central bank decision tomorrow, with 76% of economists in Bloomberg’s survey forecasting a 50bps move, versus 24% for a deceleration in the pace of tightening to 25bps, including BofA (see below). White and red pack SONIA futures rose 0.25-2.5bsp today led by Mar24.

The DMO sold £3bn of the Jul 2033 Green gilt with bid to cover of 2.22 at 3.428%. The bond outperformed modestly into and out of the results, and then held in line with the rest of the curve for the remainder of the session.

In contrast the long end continued to steepen following month end led by weakness in the 30y sector. 10s/30s climbed again to finish another 2.5bps steeper and just off the day's highs at 40.6bps, while 30s/50s rose 0.5bps to -25.0bps. Shorter in, the 5y area outperformed to steepen 5s/10s to 13.3bps (+1.3).  

In spreads, the gilt asset swap curve flattened as 5y ASW richened to 48.0bps (+2.1) while 30y was little changed at -50.6bps (+0.5). There were no new sterling deals today but there more weak housing data, with the Nationwide house price index -0.6%mom/+1.1%yoy in January. This encouraged the asset swaps bears at RBC, who point to lower mortgage approvals and sharply increased interest in tracker mortgages as additional negatives for mortgage paying and 5y asset swaps, especially with gilt redemptions and <1y index events now behind the market.           

BofA: Tight 5-4 vote for +25bps; Look at B/E flatteners and Aug23 SONIA longs   

Bank of America, in the minority camp, looks for the BOE to hike 25bps this week although it stresses that the risks skew “heavily” to a 50bps hike. Indeed, forward SONIA for the meeting is implying a 45bps rise in Bank Rate, to 3.95%.   

Beyond this week, BofA looks for another 25bps hike in March which would take the Bank Rate to 4.00% versus implied SONIA forward pricing for March of about 4.25%. Ultimately, the forwards see BOE rates peaking at around 4.45% in June 2023, versus BofA’s central expectation for the Bank’s terminal rate of 4.00%, reached in March. It explains: “falls in headline inflation, recession and an easing labour market should allow the BOE to pause” after the MPC meeting on March 23rd.

BofA ponders the likely balance of voting this week and suggests focussing on the hawks and the doves rather than the swing voters:

”We would expect the vote to be split, and tight, in either a 25bp or 50bp hike case. If 25bp, we would assume the doves (Dhingra, Tenreyro) join with some of the core of the Committee giving perhaps a 5-4 in favor of 25bp, or 5-3-1 with one dissent for 75bp. For 50bp, we would assume a three-way split is most likely, 2-6-1 (no change, 50bp, 75bp) with possibly a four-way split. Given the many permutations, focus on the tails of the vote (how many hawkish dissents and how many votes for 25bp).”

What about trades for the meeting and beyond? BofA likes breakeven flatteners and Aug23 SONIA longs:

“The most critical problem the BoE faces is the likely un-anchoring of inflation expectations. We continue to see value in (2y3y/5y5y) breakeven flatteners in the UK as inflation persistence hedges… The risks to this trade are a rapid fall in underlying inflation pressures (notably earnings) and 10y area RPI receiving by pension funds.”

 

“Our base-case expectation for the Bank rate to reach 4.00-4.25% peak implies at least around 25bp downside risk for August 2023 dated SONIA…We are received August MPC SONIA.”