GBP Swaps: Gilts stay in range as rally fades; 50y talk; Budget eyed

Jeremy Hunt 14 Oct 2022
A smooth APF in the afternoon capped a calm day for gilts, where 50y is outperforming. NatWest sees gilts under pressure post-Budget.

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  • Gilts stay in range as rally fades; 50y talk

  • NatWest: £230bn of gross gilt issuance seen in 2023-24; 10y yields to hit 4.3%


    Gilts stay in range as rally fades; 50y talk

    A smooth APF this afternoon capped a day of gentle market movements driven by news from offshore instead of mayhem at home and only served to add to the eerie feeling that things aren’t too bad here on Airstrip One.


    At the close of play today the 2s/10s curve was +1bp at -1bp and 10s/30s was +1bp at 33bps. Looking across the curve, one senior gilt/IRS trader at a leading GEMM said late this afternoon that “today we’ve been trading US data (higher-than-expected jobless claims rallied bond markets ahead of tomorrow’s NFP) and it’s been in the same range as yesterday, but we might test resistance going into the close.”  


    The 10y gilt yield range for the last two days has been 3.72-3.87% but having sunk to 3.74% late today, the yield edged higher at the death to close at 3.78%, 2bps higher on the day.


    More generally, the senior trader said “there’s been positive news about gilt supply, forecasts (for 2023-24) have dropped from around £300bn of supply to £250bn or lower so that has created a tailwind for gilts for the time being.”


    He added that “some soft gilt sales (including APF sales) were weighing on gilts but they have come back this month, especially the ultralong, and especially 50-years.”


    The long-end received a fillip from a decent 2061 sale yesterday (GBP Swaps: Flatter as 2061 snapped up; L&G likes big buy-ins | Article | Total Derivatives) but the swapper noted that over the last week the 50y in particular has outperformed, with 30s/50s gilts flattening 5bps at the time of writing versus Mar 2.


    And where is the 50y buying coming from. “Customer buying,” said the swapper.  LDI buying? “Customer buying,” he repeated stoically.


    The dovish repricing of rate expectations in January was itself repriced in February which has coincided with a recent stabilisation of front end swap spreads, along with the fact they are now trading in the same zone that they were prior to the Truss interregnum.     


    Today the front end of the ASW curve did skip a little lower as the curve as a whole steepened. At the 4:15pm close the 2y was -2.2bps at 44.9bps, 5y was -1bp at 32.5bps, 10y was +1.9bps at -9.8bps and 30y was +1.7bps at -57.3bps.  In linkerland, breakevens were +3 to +6bps across the curve as real yields bull-steepened. RPI swaps also rallied, led by a 7bps jump to 4.17% in 1y, petering down to +4bps in the ultralong swaps.


    And as for that APF event today. The £650m sale had bids of £1.67bn for a strong bid/cover of 2.57 times. The most-sold gilts were the 4.25% 2027 and the 1.625% 2028 which between them accounted for more than half (£330m) of the gilts that were placed with bidders.


    NatWest: £230bn of gross gilt issuance seen in 2023-24; 10y yields to hit 4.3%

    Looking ahead to next week’s Budget, strategists at NatWest today predicted gross gilt issuance to be set to be around £230bn, with net (of redemptions and APF activity) put at £190bn, in 2023-24. Explaining its view, NatWest said “we see two key factors that will drive the market reaction to the gilt remit: i) the extent to which the Treasury thinks it is able to fund its expenditure through other sources, namely via bills and NS&I and; ii) the skew of issuance away from longs and linkers.”


    It predicts an increase in bill stock of £20bn, and a maximum of £15bn of financing from the NS&I.


    NatWest says “Only partial recycling of fiscal savings made in FY22-23 (at least for now) and some funding via NS&I and bills suggests gross gilt issuance this year of £230bn. Although this is lower than our expectations following the Autumn Statement, markets should not underestimate how much of a regime change this still represents for the supply of gilts. Gilts net of redemptions and BoE activity will reach record highs, even with generous assumptions on NS&I and t-bills. We pencil in net gilts of £190bn – more than triple the yearly average in the decade prior.”


    In terms of distribution, it said “A lack of demand will drive issuance away from the long-end. Particularly in light of the events of last year, we expect the DMO will be cautious about flooding the long-end with issuance against a backdrop of limited demand. We expect the issuance amount (in £bn terms) of both longs and linkers to remain broadly unchanged vs FY22-23 (once the unallocated portion has been split between the two), meaning a smaller relative proportion of a higher issuance number next year. Instead, we think the short and medium buckets will bear the brunt of the issuance.”


    And after the Budget, concludes NatWest, “A heavy supply schedule will soon start to weigh on yields. Average weekly net supply (including APF) in FY22-23 was £1.67bn. In FY23-24, we project this to increase to £3.59bn, i.e., we expect average weekly net supply to more than double. There will be very few days next fiscal year that don’t see either DMO auctions or BoE auctions, and we expect this to bring about signs of supply saturation relatively quickly. The clearing price for gilts will have to adjust gradually lower. We target 4.3% in 10y gilts.”