GBP Swaps: 1y1y roundtrip; Fading gilts; Hawkish hedgies

1y1y roundtrip; Fading gilts

“It’s been pretty quiet, pretty boring really,” was one gilt market veteran’s upbeat assessment of this first session of the first full week of March. Gilt futures volumes of around 140K certainly suggest a market that isn’t exactly buzzing, but with little domestic news of interest and the scheduled international events (Powell and NFP) coming later, that’s probably fair enough.

In terms of gilts today, the 10y opened a couple of bps below Friday’s close at 3.82%, and in choppy price action got as low as 3.77%  at lunchtime. It then sold off in the nick of time for the BOE APF QT operation, helping the £650m sale of 2030 to 2042 gilts to attract a strong bid/offer of 3.29 times.

The 0.25% 2031 was the star in terms of accepted bids, with £356m of £663m bids being taken down at 3.754% yield. But having sold off going into the sale, the gilt market struggled to pull off the other trick, of rallying in its aftermath. Instead, a significant Bund sell-off, apparently because a hawkish ECB policymaker said something hawkish, helped drag gilt yields higher day-on-day by late afternoon.  Another sign if needed that bond markets abhor a vacuum, although as the close approached the 2031 has rallied again to be back at today’s auction price of 3.754%.

But, as the above gilt source said the main story today was one of little significant homegrown drive as the market instead contented itself with consolidating its recent repricing of future rate expectations.

The above source noted that “the Bank of England will still probably hike 25bps in March, so that all looks as-planned, but it is after March where the pricing has changed. The 1y1y was up at 4.40% on Jan 1, got down to nearly 3.30% in late February. It’s now about 4.40% again.”

“So,” he explained, “rightly or wrongly the market is pricing out rate cuts and has gone even further. It’s now pricing 23bps (of hike) in March, 45bps by May, 60bps by June and 80bps by September. Cuts aren’t priced in now until 2024.”

“So instead of a flat curve its now sloping upwards as far as 1y1y… the market was pricing in a very dovish scenario and now it’s looking like it’s been too clever for its own good.” Again, the feeling that the gilt market is poised, waiting for a new narrative having priced in optimism and now repriced in pessimism, is tangible.

Late in the session the 2y gilt yield was +3bps at 3.71%, 5y was +2bps at 3.66%, 10y was -1bp at 3.84% and the 30y was -2bps at 4.19%. SONIA futures were little changed, while ASWs steepened in line with gilt moves. The 2y ASW is currently -3bps at 42.9bps, 5y is -2bps at 37.4bps, 10y is -0.7bps at -13bps and 30y is -0.5bps at -59.5bps. Real yields are little-changed across the curve while front end RPI swaps are +4-6bps and the long end is -1bp.  

NatWest: Hawkish hedgies sceptical about pricing

Strategists at NatWest were on the road visiting hedge funds last week ahead of the March MPC and UK Budget events, trying to get a flavour of where they see gilts heading throughout this big month and the rest of this still fairly new year.

The flavour it seemed, was relatively hawkish, with hedgies sceptical, about any happy-clappy outlooks for inflation and rates. NatWest said that while it is continuing to visit customers this week, two key themes already stand out to them:

• "Although this wasn’t a unanimously held view, the vast majority of clients we saw last week were concerned that the BoE’s current signalling – that the peak in rates is near – is much too dovish, especially when considering the skew of risks to inflation. The consensus view was that the risks… were skewed so strongly to the upside that the BoE was adopting a relatively risky strategy to managing monetary policy by signalling with any conviction that the peak in rates was near."

   

• NatWest also said it was notable how little interest there is thus far in the Budget and its implications for gilt supply. It said that despite the fact that the Budget (15 March) will take place before the next BoE meeting (23 March), clients were "much keener to discuss our MPC views than our expectations for the Budget and the gilt remit."

On the latter point NatWest said that “market expectations of the downside risks to the gilt supply number in the FY23-24 remit may well have gone too far. The relative lack of interest from hedge fund clients last week may be indicative of this, and of a general consensus that gilt supply is not going to weigh as much on yields as previously expected. We think this complacency is wrong.”

It added that “The supply / QT trade has so far weighed more heavily on 30y yields than 10y, but we think that should start to reverse. We like being short 10s on the 2s10s30s fly as a result.”

In conclusion, and following last week’s largely bearish trading, NatWest said that “10y gilts hit our target of 3.75% last week. We now revise this up to 4.3% on account of a still-elevated supply schedule in the months to come, and very little demand for duration particularly against a backdrop of concerns about the persistence of inflationary pressures. We think investors will require stronger evidence of disinflation, and more certainty over the level of terminal rates, to be comfortable taking down all this additional supply. The clearing price for gilts will gradually shift lower than here, we think, taking yields to 4.3% by Q3.”

New issues

• Coventry Building Society has mandated Barclays, JPM, NatWest, TorDom and UBS to lead a £500m 5y SONIA-linked Covered FRN. 

   

• Land Securities has mandated BNPP, Lloyds and NatWest to lead an upcoming 9.5y secured (AA/AA-) Green Bond issue following investor calls today.

   

• Mizuho has mandated Barclays, HSBC, Lloyds and NatWest to help it lead a GBP-denominated 5-7y bond following investor roadshows on Mar 9.

   

• Air traffic control group NATS (En Route) plc has mandated Barclays, BNPP, Lloyds and NatWest to lead a £135m tap of its 1.75% Sep 2033 bond.