GBP Swaps: IL51 well received in serene market; Budget eyed

Baloon inflation night 9 Jul 2020
Today's main event in the gilt multiverse was the IL51 auction, the outcome of which was very 'linkery' according to traders. BNPP peeks at the Budget

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  • IL51 well received in serene market; Pill warning

  • BNPP: Budget: Positive CGNCR news, but little MPC impact

  • New issues: Scotia


    IL51 well received in serene market; Pill warning

    The standout event in the gilt multiverse today was the long-awaited IL51 auction, something given added cache due to it not being one of those nominal gilt sales that are flying off the shelves every 30 minutes or so at the moment.


    The £650m sale saw the IL51 go through at a strike price in RY terms of 83.5bps and with a bid/offer ratio of 2.4 times, in line with the auction average of 2.36 times during its two-year lifespan so far. However, sources noted stronger overbidding than at the previous two auctions of the 30y benchmark linker.


    And one senior trader at a leading GEMM said this afternoon that “the sale was pretty strong. There’s been a lot of cheapening over the last month and some recent linker auctions have traded weakly, but this has held in reasonably well.” As for the actual auction he added that “it cheapened up going into the auction, then people paid up a lot – 3bps through mid – to actually buy it. The linker market quite likes to pay up after cheapening…”


    Another jaded linker trader made a similar observation, noting that “IL51 tried to follow the classic linker auction script of dip into pricing, clear half a point through mid, then bid into the close. However, in the end, weak nominal markets intervened and IL51 spent the afternoon back in its pre-pricing range. Still, the BE edged higher in the nominal led sell-off, up about 3.5bps.”


    Looking at the current price action, the IL51 is back yielding 83.5bps again, having briefly dipped as low as 79.25bps shortly after pricing, but linker traders were content that this was a broadly successful sale, with a welcome lack of drama.


    And as such, it seems to have caught the zeitgeist. The above dealer said that the recent theme in the linker market has been one of “ranges are tightening in, it’s much less volatile and just much more stable now. Today, for example, was very calm despite the auction.”


    Phew, well that must be very welcome after all the crazy post-Truss volatility? “Hmmm…” said the trader, reminding us that one person’s meat is another person’s poison. And vice versa.  


    Similar sentiments were expressed in nominal gilts where a gilt/EGB trader said this morning that diminishing bearish responses to overshooting inflation indicators both in the UK and mainland Europe, showed that the shorts are in charge now, capping downside risk to an extent.


    Happily gilts were more-or-less minded to support that view today, with front end yields up 2bps and 10y and 30y +4bps at the time of writing. Swap spreads were pretty calm too with 5y +1bp at 39.8bps, 10y unchanged at -11.6bps and 30y +0.5bps at -57.5bps.


    As well as moving broadly in line with EGBs, while slightly outperforming USTs after the US labor cost data, gilts were softened up a bit late in the session by the ever-changeable BOE Chief Economist Huw Pill, who today was keen to emphasise the tightness of the labour market, the associated inflation risk, and the unexpected strength  of the UIK economy. The SONIA futures strip though wasn’t too alarmed, with the front end currently 2 ticks firmer and the long end -3 to -6 ticks.


    Finally, heading back to inflation, breakevens approached the close of play +8bps in 5y fading to +3bps in 30y, RPI swaps were +9bps in the iconic 1y maturity, at 4.07% and +4bps in the 30y and ultralong end.


    BNPP: Budget: Positive CGNCR news, but little MPC impact

    Taking a look at the upcoming March 15 Budget, strategists at BNP Paribas said today that they “project the government’s funding requirement (CGNCR) at GBP175bn, GBP13bn below its November projections. In our base case, the improved macro picture and modest fiscal loosening means that Hunt hits his fiscal targets a year earlier than expected.”


    Which is very nice, of course. But perhaps not as relevant to the direction of the gilt market as such an achievement may have been in years gone by. BNPP says that “Our central case is that the improvement in borrowing reflects cyclical factors. The small structural loosening we bake into our base case – between GBP7–10bn p.a. – will have little meaningful impact on demand.”


    “Using the OBR’s fiscal multipliers, we think the new measures could increase the output gap and the level of GDP by 0.2%. Such a small change would have a marginal impact on medium-term inflation, and we therefore do not see a need to move away from our current call: that the MPC will hike Bank Rate 25bp to 4.25% at its 23 March meeting and hold it there across 2024. That said, our central case for a net loosening at the budget reinforces the upside risk to our call.”


    New issues: Scotia

    • Bank Nova Scotia this afternoon priced a £1.25bn 4y Covered FRN at SONIA +62bps via Barclays, Lloyds, Nomura, RBC and Scotia.