GBP Swaps: BOE, shorts and positioning send gilts to a frenzy

BOE, shorts and positioning send gilts to a frenzy

Volumes of 300K and rallies of 30-40bps in red and green SONIA futures, short-dated linkers and the 10y gilt together paint a pretty vivid picture of the market’s view about the remaining pathway for the BOE’s hiking cycle.

There really isn’t much of a one, basically, is what the market is saying loud and clear.  

Attempting to sum up what really does appear to have been a pivotal session, one gilt market participant said this evening that “this wasn’t just a repricing, which you sometimes get. This was buying from the start of the day that just grew and grew as the day went on.”

He said that two factors helped drive a move that definitely surpassed all expectations. “I think people were expecting three hawkish sets of comments from the three central banks and it didn’t work out like that. Also there’s positioning… the market has been pricing in too many hikes given that CPI has been under-shooting forecasts for the last few prints.”

This glut of short-covering drove high volumes across the curve in cash as well as high futures volumes, while SONIA volumes were through the roof with Jun23 topping 150K at the time of writing.

And looking at the curve the gilt source said that “the curve has been steepening for a while now, and it steepened again today. Again, that is partly to do with positioning and the rest is simply the rate outlook.”

Eyeing the road ahead in rates, the above source said that “it is going to be data-dependent but I suspect that’s it for rate hikes.” And looking two MPC meetings ahead he said that “come May 11 the world will be a better place and inflation will be well on the way down... I don’t think that is conducive to hikes.”

One eye-catching shift has been in the Gilt-Bund spread. In mid-January the spread was in the 130bps area. Today, with gilts outperforming all-comers (including Bunds by nearly 10bps), the spread was 93bps at the close of play, and even after this move, the gilt contact said it isn’t a nailed on sell. “The ECB has a fair way to go. The BOE hasn’t. So I wouldn’t necessarily fade the (spread tightening) yet.”

At the 4:15pm close today gilts 2s/10s had bull flattened 6bps to -16.7bps and 10s/30s bull-steepened 11bps to 51.7bps.

The 2s30s ASW curve flattened markedly as the 2y ASW richened 6bps, 10y was +2bps at -8.3bps and the 30y was -1.8bps at -52.5bps.

And finally, in inflation, real yields took on nominal gilt yields, matching their moves almost step by step, as 5y RYs closed 33bps lower and 30y closed 14bps lower. That left breakevens 2bps wider in 5y, and only 5bps tighter in 30y. 

ABN: 25bps maximum left in MPC’s tank

ABN Amro strategists came up with a refreshingly straightforward vision for the future of UK rates from here, saying they are either going nowhere, or perhaps up by just another 25bps. It notes that the MPC "raised its growth forecasts, and lowered its inflation and unemployment forecasts, bringing its view closer to our own that the unfolding recession will now be a relatively shallow one.”

Noting that the MPC has dropped its oh-so-tough threat to respond “forcefully” to inflation threats that it offered last time around, ABN said that “We now expect one more 25bp hike, with the risk skewed to no further hikes. Following today’s decision, we add a further 25bp rate rise to our profile, with Bank Rate therefore now expected to peak at 4.25% (previously 4.00%). However, the BoE is now moving into data dependent mode, in our view, and so we see a significant risk that the last 25bp hike does not materialise.”

“We continue to expect the MPC to start lowering rates from Q4 this year, given that inflation is expected to be significantly lower by year end, and the unemployment rising, thereby reducing risks to the medium term inflation outlook stemming from labour market tightness.”