GBP Swaps: Hawk makes for sticky start to tricky week

Hawk side 1 Jun 2021
Early hawkish MPC comment followed by a glut of supply from all quarters saw gilts reverse much of Thursday's ill-gotten gains.

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  • Hawk's return means sticky start to tricky week

  • BofA on key positions post-MPC

  • New issues



Hawk's return means sticky start to tricky week

The reversal of Thursday’s surprise and high volume rally on the back of the BOE (and the big two central banks) began with NFP on Friday (when 10y gilt yields were at 2.99%) and continued today with hawkish ECB and MPC comments. By the close the 10y gilt yield was +18bps on the day at 3.23%.


Catherine Mann’s comments this morning that the likely next move by UK rates is up was in keeping with her hawkish persona but no way to start the working week for a market that was already beginning to wobble inside its newfound dovish persona.


After two days of striking outperformance of Bunds and USTs, gilts today underperformed them both by about 9bps in the 10y sector on what was for a Monday a high-volume session with 227K of gilt futures changing hands.


One trader said that “after last week this represents a mood change. Even on Friday the curve was still steepening but today it bear-flattened (by 3bps in 2s/10s gilts and by 6.5bps in what had been a stubbornly steepening 10s/30s sector).”


He said that the market might have been premature in writing off the chances of hikes, or at least restricting expectations to a 25bps maximum, and said the curve shift was the most significant move of the day.


But it may yet reverse. He said that “this was something of a perfect storm as a week of heavy supply started off both with Mann’s comments and a rush of GBP issuance,” and said the moves both on the curve and in swap spreads reflected this.” In other words, he said, for a day with no serious data and significant weakness in Bunds and USTs, this was a worse-than-typical set of circumstances for gilt bulls.   


In swap spreads the 2y closed 6.5bps tighter at 53.4bps, 5y closed -2.5bps at 45.7bps, 10y closed -1.5bps at -9.4bps and the 30y ended the day at -52.8bps, down 0.3bps. New issuance included £750m of 3y from Danske, £300m of 5y from BT and £150m of 18y from Investec.


On top of that there was a £650m APF sale of medium-term gilts to kick off a week that continues with £3.5bn of 4.125% 2027s tomorrow, £2bn of 2039 nominals on Wednesday and a short APF auction on Thursday.  



BofA on key positions post-MPC

Following Thursday’s perceived dovish 50bps hike by the MPC strategists at BofA have revisited existing trade recommendations in inflation, SONIA and nominal gilts.


Starting with inflation and BofA said that prior to the MPC, it had “emphasized seeing value in RPI inflation flatteners as inflation persistence hedges, while seeing risks to terminal rate pricing skewed to the downside.”


“We hold onto 2y3y/5y5y RPI flattener entered at -13.8bp, targeting -45bp with a stop of 5bp (risk to the trade: 10y RPI receiving demand). Current level of the trade is -25.7bp. A more dovish than expected BoE should be marginally supportive for our inflation persistence view, underpinning 2y3y RPI relative to the 5y5y rate.”


And looking at the front-end of the nominal futures curve it says that it still recommends “receiving August 2023 MPC dated Sonia entered at 4.40%, targeting 4.10% with a stop of 4.55% (risk to the trade: BoE needing to hike more). Current level of the trade is 4.26% (at the time of writing). Market repricing following the MPC was in the direction of our view, but we think there is more to go. Receiving further-out dated Sonia MPC like August still makes sense to us given the uncertainty whether additional 25bp hike would come in March or May.”


“And some upside premium priced in the very near-term MPC (March, May) makes sense to us also given high uncertainty about the data near term. But 35bp of hikes priced in by the market before the terminal rate is reached still lies above our base case scenario for 0-25bp ahead.”


New issues

  • Danske Bank has priced a £750m, 4y NC3 bond at gilts +170bps via Barclays, Danske, HSBC and NatWest. Books topped a lumpy £1.8bn.


  • BT has priced a two-tranche bond consisting of a £350m, 18y leg at gilts +200bps via BNPP, Santander and Lloyds (B&D), and a €750m, long 8y tranche at swaps +93bps via BNPP (B&D), Santander and MUFG.


  • Investec priced a £200m tap of its 1.875%, 2028 bond via JPM and WFC. It priced at gilts +330bps.


  • TSB Bank PLC has mandated Banco Sabadell, Lloyds, NatWest, Nomura and RBC to lead a GBP-denominated 4y Covered FRN.