GBP Swaps: Bull-steepening; ASW cheaper; BOE view

Bond chart 30 Jan 2023
Gilts outperformed Bunds as the curve bull-steepened although deal pricings were accompanied by cheapening in asset swaps.

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  • Bull-steepening; ASW cheaper

  • NatWest: BOE fairly priced, stay bearish gilts

  • New issues: Yorkshire Water, Deutsche Bank, Tesco


    Bull-steepening; ASW cheaper

    Gilts turned in a strong performance versus core Eurozone with the US closed today, but lagged versus swaps. The spread to 10y Bunds crunched back to 101bps (-6ps) as the market corrected Friday’s gilt weakness and the BOE’s £650m medium gilt APF sale went well, with solid 3.00 times cover. The Bank largely ignored £563m in bids for the 4.25% 2032 in favour of accepting bids of £275m for the 4.5% 2034, and £270m for the 4.25% 2039.    


    The gilt future ended off session highs but still about 50 ticks stronger in lowish volume of just under 150K. Along the curve there was a burst of 2s/10s (bull) steepening into the close to close at -25.1bps (+0.3) while 10s/30s rose through the morning to end at 42.8bps (+0.6) going into this week’s £2bn 30y auction. Still, 30s/50s steepened more, to -27.7bps (+1.4), reversing some of last week’s ultra long flattening.


    At the front end red SONIAs rose steadily to finish 5-10bps higher, albeit in low volumes.  Rightmove house price data this morning showed a flat mom reading for February, against the usual seasonal pattern, and a consequent fall in the annual rate of house price growth to 3.9%,  from 6.3% in January. However, hope springs eternal among the UK’s estate agents and buyer enquiries were up, according to the survey. Preliminary PMIs are due tomorrow with the market looking for modest gains across both the services and manufacturing indices, while the BOE’s Mann, Cunliffe, Tenreyro and Broadbent are all due to speak later this week.


    IG issuance was surprisingly strong in euros for a US holiday and that was echoed in GBP with deals from Tesco (12y) and Deutsche Bank (8y NC7) priced today, while Yorkshire Water met investors to discuss upcoming 7y and 12y bonds. Gilt asset swaps cheapened across the curve led by the belly through the afternoon, with 5y finishing at the day’s lows around 39.7bps (-2.1) and back under 40bps for the first time in a year. 10y spreads cheapened to -15.8bps (-1.4),the most negative level since Covid hit, if the charts are correct.


    Inflation only partly recovered from the fall at the end of last week with RPI 1y up 3bps to 3.89% and 30y just a bp wider at 3.36%. Longer cash breakevens were little-changed as real yields rallied back from Friday’s highs by 3 to 6bps, led by the 10y-15y area of the linker curve. A very light, US-afflicted selection of RPI clips on the SDR today included 3y at 3.97%, 4y at 3.965% and 30y at 3.34% (see link). Elsewhere, iota trades included 15y at 10bps while 30y went through at 1.25bps in the Street (versus 0.75bps last week).


    NatWest: BOE fairly priced, stay bearish gilts

    NatWest suggests the following themes are likely to be key for sterling rates this week, including steepeners and outright or cross-market shorts:


    • “Data is strong enough to keep the BoE on track for one more 25bp hike. Risks are skewed to the upside, but markets shouldn’t get ahead of themselves: ~35bp of hikes priced over the next two meetings is a fair reflection of the risks.”


    • “Front-ends led the curve higher last week, but the long-end should do move of the heavy lifting. We see fair value in 2y yields at ~3.7%  (i.e. current levels), and 3.75% in 10y. The curve should re-invert.”


    • “This week kicks off three weeks of heavier supply which might not be met with the usual LDI demand we would expect at this time of year. Data continues to show evidence of weak foreign demand, too. We like curve steepeners and being bearish gilts outright (and cross-market). Short 10y gilts vs 3y US captures both themes.”


    New issues: Yorkshire Water, Deutsche Bank, Tesco

    • Yorkshire Water (Baa2/A-) plans GBP 7y and long 12y Sustainability bonds via Barclays, Lloyds and RBC after meeting investors on Feb 20.


    • Deutsche Bank today priced a £750m short 8y NC7 6.125% SNP (Baa1/BBB-/BBB+) at gilts +270bps. Self-led and books above £1.3bn.


    • Tesco today priced a £250m 12y 5.5% at gilts +180bps and a €500m 8y 4.25% at swaps +130bps. Books above €1bn and 1.3bns, respectively. Leads are BNPP (B&D), Rabo, Santander and StanChart.