GBP Swaps: Sell-off evaporates; NatWest eyes fly

Fly 26a Aug 2020
In a heartening move for gilts, an early sell-off was batted away and then fully nullified by strong APF bids. NatWest looks at a fly.

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  • Sell-off fades to leave market unchanged

  • NatWest: Time to short 10y gilts on a 2s10s30s fly

  • New issues: IADB, Lloyds



Sell-off fades to leave market unchanged

After a sticky start to the day following last night’s hawkish Fed minutes, MPC hawk Catherine Mann popped up at about 11am London time to twist the knife, calling for faster and more pernicious tightening than is being priced in.


Her views being well known, this had zero market impact. Perhaps Mann needs to start demanding 200bps hikes in-between meetings to get across the message that the only way to beat imported inflation is to hike domestic rates.


Mann being easily negotiated, the next challenge on today’s busy calendar was US data, where Q4 GDP Price Index revisions talked of fresh inflation risks, sending 10y USTs 3bps higher, before an after-data rally more than made up the lost ground.


The 10y gilt followed suit and after peaking at 3.68% on the US data, rallied back before a mini re-peak at 3.64% when the ATF was processing. Wariness made sense given the recent memories of the ‘uncovered’ APF gilt sale, but today’s sale of Jly 2026 to Oct 2029 gilts went well.


Bids focused on the front three available gilts, 1.5% 2026, 0.375% 2026 and the 1.25% 2027, which attracted a collective £1.2bn of bids, £457m of which were accepted. Total bids for the seven eligible gilts were £1.48bn for a comfortable 2.28 times bid/cover.


Thus soothed, gilts rallied into the close with the 10y closing triumphantly -1bp on the day at 3.595%, resulting in a 1bp flattening of 2s/10s and a 11bp steepening of 10s30s on what ended up the most static of days in gilts net-net. But the sell-off and then rally will give heart to doves that the recent fashion for hawkishness has run its course.


In swap spreads the moves were mostly quite restrained, with the 2y ASW the biggest mover +2.2bps at 45.6bps. The 5y closed -0.7bps at 40.1bps. 10y was +0.8bps at -11.5bps and the 30y was unchanged at -53.7bps. SONIA futures ranged from unchanged to -5 ticks in the belly of its curve, and RPI swaps fell 3bps in the 1y but were on the while little-changed, as were breakevens.  



NatWest: Time to short 10y gilts on a 2s10s30s fly

Strategists at NatWest said this morning that in their opinion, 10y gilt yields have had it too good, for too long. It said that a recent re-flaring of rate hike fears following some decent UK data, combined with ultralong underperformance for supply reasons have seen the 10y sector outperform shorts and longs more than is merited in recent weeks.


It said that it still believes the rate cycle has a maximum of 25bps left in it, despite some positive recent data, so the front end is due a rally. In the long end, supply dynamics are likely to see future gilt issuance edge back from recent forecasts in the new year starting at the end of next month.


But also, demand for long gilts is an important factor in its fly view. It says that “A large driver of our long-held bearish view in gilts is not just about the supply outlook, but also the offsetting demand story. LDI demand at the longer-end of the curve has been slow to materialise this year, but that might change in the months to come as schemes look to lock in high funding ratios in a bid to head to buyout. The performance of equity over rates means that there has never been a better time for pension funds to switch out of stocks and into bonds. A more stable risk environment might help focus pensions on this de-risking activity.”


In conclusion, NatWest said that “2s10s30s has not been behaving directionally of late (correlations with 1y1y and 5y5y are low). Despite the lack of clear directionality in the current regime, intuitively in big moves, the 10y may tend to outperform the wings in a sell off as 2s10s inverts more than 10s30s. The fly probably has a somewhat bullish exposure outright. Being short 10y on the 2s10s30s curve is also positive carry, at ~7bp/year.”



New issues: IADB, Lloyds

  • The IADB has priced a £400m, Dec 2029 Sustainable Bond issue at gilts +47bps via Barclays, Deutsche and HSBC.


  • Lloyds Bank is on the brink of pricing a £750m, 10.25y NC5.25 bond at gilts +310bps via BofA, GS, Lloyds and Santander.