GBP Swaps: Gilts fade; 1y1y RPI; Buy 30y ASWs

Gilts fade, bear-flatten; 1y1y RPI

Gilt yields opened higher this morning then traded in a pretty tight 7bps range in 10y for much of the day as they were dragged higher by weaker, but not as weak, intraday price action in Bunds and USTs. Schatz yields actually notched up their highest level (2.76%) since those ever-so dark days of 2008 while 2y gilts had pushed up to 3.59% by the close as the curve bear-flattened amid a late slide in SONIAs, down as much as 20 ticks for Jun24.

As the close approaches though they are weakening more intently and at 3.40% (+11.5bps) the 10y has now more than reversed all its gains from last Thursday’s curve-spanning 30bps or so rally, in what one trader said was a very busy week in terms of the curve, outright trading and flickering LDI intervention.

And LDI was also topical in the RPI market today (as well as in research, see HSBC below) where traders said they have been visibly active in the long end of the linker market this week, typically popping up just before the market close to buy or sell and inject a frisson of late volatility into proceedings.

Once again though it has been the front end of the RPI curve that has seen most life. One senior inflation trader at a leading GEMM said this afternoon that  “1y1y (RPI) forwards traded 3.70-3.80% all of January, this week they have been totally ripped and gone up to 4.30%.” RPI 1y is up a modest 3bps to 3.89% today while 2y is down a bp to 4.05%, leaving 1y1y around 5bps softer at 4.20%.

“There are a few theories, one is that there’s a clearance of positions with shorts being stopped out, or that it reflects the central bank hiking focus appearing to fade, but I don’t completely buy that. It feels like a flow.”

And over in cash breakevens the same trader said “they’ve been pretty quiet today, but I think we will see them coming under selling pressure starting next week as supply gets closer.” The DMO is auctioning IL51s on Mar 2, with details of auction size coming on Feb 23.

But, conceded the loyal linker trader reluctantly, “this week’s been all about nominals, yesterday’s failed, in inverted commas, auction (see Total Derivatives ) and the shifting directionality of the curve.”

With the close looming, the 2s/10s gilt curve is 1.2bps flatter at -19.6bps, while 10s/30s is 2.3bps flatter at -42.3bps. And in swap spreads, the 5y is +1bp at 45.8bps, 10y is +0.3bps at -10.1bps and the 30y is -0.3bp as at -55.1bps.

SONIA futures are down by 3-12 ticks in the whites and by as much as 20 ticks in the reds following mixed fourth quarter GDP/output data, and comments by BOE Chief Economist Huw Pill. 

HSBC: Buy 30y ASWs on LDI hopes; Close 30s50s steepener

Strategists at HSBC today updated their view of the long end of the GBP curve, recommending buying of 30y ASWs and closing out its 30s/50s gilt steepener. What it calls a sprint to the finish line for LDI “offers reason for near-term optimism.”

“This,” it adds, “is based on the view that attractive valuations, improved solvency ratios, fresh appetite to reach buy-out and increased regulation will spur a flurry of hedging activity in the coming weeks.”

Describing the recent sharp steepening of the ultralong end of the gilt curve a function of the reversal of the “kneejerk” flattening during the Truss mini-era, HSBC said that “long-end valuations are looking attractive on various metrics and we think this will be met with increased demand, including on ASW. It could be a bumpy ride for ASW spreads in the months and years ahead.”

“But at 55bp, 30Y ASW spreads are near their cheapest levels of the last year and buying offers favourable risk-reward, consistent with our forecast of a ‘near-term acceleration in LDI demand, then subsequent deceleration’. We see scope for a richening of 30Y ASW spreads towards the low-40bp area in the coming weeks, buoyed by a positive near-term supply-demand outlook and cheap valuations.”

The longer-term supply outlook remains challenging, says HSBC, but “valuations have been adjusting in order to absorb the increased issuance. Moreover, the 2023/24 gilt remit may in fact be lower than the c.GBP300bn indication given in the autumn. Lower energy prices may reduce the financing requirement while increased funding via T-Bills and NS&I may also lower the burden on gilts. On top of this, we expect the DMO to skew supply away from longs and linkers, lessening the supply of duration. Over the longer-run, we retain our view that a 50-60bp range is likely to prevail as the pace of LDI demand wanes and the impact of buy-out activity intensifies.”

Arcadia in pension buy-in with Aviva

There were more announcements today of new pension de-risking trades as that market starts to really heat up after the difficult autumn and winter period. Aviva announced today that it has has completed an £850m buy-in of the Arcadia Group Pension Scheme and Arcadia Group Senior Executive Pension Scheme on February 3. The transaction enables the Trustees to secure benefits in excess of Pension Protection Fund levels for around 8,800 members of the schemes.  

It follows news yesterday of the completion of a £250m buy-in of British American Tobacco’s pension fund by PIC, taking the total buy-in at BAT to £4.1bn.