GBP Swaps: A tale of two tails; Happy ending for DMO

A timely rally raises market mood

Hopes that despite Russia, despite the mysterious consequences of Corona and despite the UK political meltdown in the Autumn, that things might be better have been under pressure lately.

Inflation is threatening to ignore time’s gravity and just stay at high levels, the UK has been completely bankrupted by its Tory Overlords, Brexit is a complete disaster… all these concerns have grown during February. But now, just in the nick of time, optimism is returning.

Yesterday the government found that it was nearly £40bn less broke than expected. Today strategists at Citi said UK CPI will be back at 2% later this year, while a range of strategists are upping their UK GDP growth forecasts for the year ahead.

The weather forecast heading into March may well be pretty awful, but outlooks elsewhere are improving, and after threatening a return to freefall, and having hit 3.69% earlier today, up 70bps from their recent Feb 2 low, 10y gilt yields recovered to close at 3.59%, -2bps on the day, carrying the Green 2053 tap along with it (see below).

Why the rally? Hard to say, sources say that the UST market has rallied going into the release of the FOMC Minutes at 7pm London time today, though given the changing landscape since the Feb 1 conclusion of that FOMC meeting the UST-led rally is perhaps a bit puzzling.

Or… having sold-off so much lately, maybe market participants think that confirmation of the fact that the FOMC is out of date and therefore unscary might itself be a reason for short-covering?

What is clear is that having hit fresh long-term high of 3.965% shortly after 10am London time, the 10y UST has rallied 8bps since then, dragging gilt yields down with them, while elsewhere on the curve the 2y/10y has flattened 1bp and 10s30s flattened 1bp also as 30y yields closed 3bps lower.

In swap spreads, a quiet day for GBP issuance helped spreads to push more positive across the curve as gilts rallied, having softened earlier. At the close, the 5y ASW was +0.8bps at 40.2bps, 10y was +2.2bps at -12.3bps and 30y was +1.3bps at -53.5bps.

And in linkerland, real yields and breakevens were both little changed as linkers moved broadly in lockstep with nominal gilts. Even RPI swaps were unchanged up to 20y and 30y, where they fell 1bp and 2bps respectively.

King & Shaxson tells a tale of two tails

Today’s supply story came in the form of Green gilts, by way of variety, with the good folk of the DMO selling £2bn of the 1.5% 2053. After yesterday’s regular-colored gilt sale tailed quite notably, the DMO will be happy to be able to report that today’s offering, which priced at an average 4.018%, was followed around by a tail only 0.6bps in length.

This morning, strategists at King & Shaxson said they expected a very middle-of-the-road auction. King & Shaxson said that “this is the first of seven long end supply events due before the end of March, with auctions of IL51, 0H61 & 3T53 and three 20Y+ QT sales still to come. This is only the first auction of the 30Y Green Gilt, which was syndicated back in Oct-21 and again in Sep-22. It is the last issuance of Green Gilts for 2022/23.”

It said that price action between the first and second Green 2053 syndications showed a steady erosion of the Green Premium initially attached to green issuance. “Since September’s re-opening,” it added, “the fly has traded in a steady -2 bp/+3 bp range. A similar picture can be seen with the 10Y Green Gilt. While the discount is not much, there is some attraction to buying GR53 at the cheap end of this fly (+3 bp), both on the grounds of range trading strategy and for the possibility that the further development of the Green Gilt curve next FY will attract wider demand for the product. Unfortunately, the valuation going into the auction is unappealingly mid-range.”

Following the auction, King & Shaxson summized that it was indeed a, “Pretty neutral result, compared with the average for 30Y gilt auctions. Cover 2.42 vs ave 2.33, tail 0.6 bp vs ave 0.61 bp. The bond didn't seem to react too much on RV afterwards. Neutral but a relief after yesterday's poor 0H29 result.”

At the 4:15pm end of play, the Green 2053 was yielding 3.955%.