GBP Swaps: Painful session: Long-term game-changers for FI?

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Whether SVB-related flash-buying of fixed income is already over or not, the last couple of trading sessions may mark a sea-change for rate markets.

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  • Painful session: Long-term game-changers for FI?

  • Barclays: ASWs: Short-term widening, long-term tightening

  • New issues:


Painful session: Long-term game-changers for FI?  

While bank deposits haircuts and lockups are obviously serious and stressful for those involved, and the possibility of systemic risk is ultimately a threat to us all, today’s SVB-related  turmoil coincided with signs of an altogether sunnier outlook for inflation and rates than may have been imagined a week or so ago.


A big part is the dramatic downsizing of short-term rate hike expectations as a direct result of the SVB-related fixed income rally, but in addition there is Goldman. Overnight it predicted a no US Fed hike in March, and today it said that in the UK it now predicts inflation ending the year below the BOE’s 2% target, if, as is expected,  the Chancellor extends its £2,500 energy price cap at this week’s Budget for another three months. Subsequently, Barclays and NatWest have also shifted their forecasts to 'no change' on March 22, while Apr23 Fed funds futures have rallied 17bps to 4.73%.     


Bond markets reacted strongly to its first prediction, with the subsequent rally forming its own leg of the global SVB risk-off surge. If it turns out that Goldman’s two leftfield forecasts prove correct, then 2023 will be a wildly different year for fixed income than many were beginning to plan for in February, when yields repriced higher.


However, today was of course almost entirely about SVB, risk-off and Joe Biden. The huge extension of Friday’s risk-off rally amid uncertainty about the effectiveness of the US authorities' interventions and fear of global contagion saw gilts, like their peers, post eye-popping drops in yield. This lunchtime saw the 0.625% 2025 gilt bottoming out at 3.14%, which was down 46bps from Friday’s close, but after Biden’s soothing words it closed at 3.365%, a mere 23.5bps lower on the day.


Asked if Biden’s intervention might mark a sudden end of this risk-off explosion and a return to risk-on, one active market participant said that “I’m not sure if it was Biden (that stopped the risk-off rally) but the timing was good. I think people were a little stretched at the highs. Also there was a 1.5% bounce in E-minis (mini S&P futures contracts) just before Biden spoke which caught the eye.”


“I think the risk is probably for a further rally, but if US CPI comes in strong tomorrow then it will be rates higher and stocks lower. So genuinely… who knows?” US CPI traded at 6.01094% this afternoon, in line with the Bloomberg consensus forecast.


He said that trading today will have been ‘painful’ for a lot of people. “There were a lot of intraday records broken, and a lot of people stopped out at the highs…”


At the end of the day 10y gilt yield finished 25bps lower at 3.39%, while 30y closed -15bps at 3.47%. In swap spreads, outperformance by teh belly meant that the 2y closed just 1.2bps wider at 46.5bps but 5y was +7bps at 41.3bps and 10y was +7.2bps at -0.2bps. 30y was +0.7bps at -55.3bps..


Over in linkerland the moves in B/Es weren’t so dramatic as real yields fell as much as 26bps in 10y and almost kept pace with nominals. The 5y cash breakeven ended the day -4bps at 3.62%, 10y was unchanged at 3.65% and the 30y was -3bps at 3.35%.   


Meanwhile, with the Budget and DMO remit announcement happening on Wednesday, and fiscal year-end approaching, issuance this week will be a little quieter than of late. There will be one DMO auction, £3bn of the 3.25% 2033 tomorrow, and today has already seen the one QT active sale, of long gilts, for the week.


The last such QT sale saw a bid/cover of 1.99 times and the 0.625% 2050 gilt was the most bid. Today’s £650m sale received a near-identical 2.0 times bid/cover. Today it was only the third most-bid, with the 2071 receiving £285m of bids, all of which were accepted, while there were hefty bids for the 2051 and 2044 gilts as well.


The 2050 gilt rose 4% today and was picked up at an average price of 46.453 at the APF sale, but despite this being one of the most bullish days in fixed income’s entire history, outright buyers at that price will not yet have made a profit as it closed at 45.935.



Barclays: ASWs: Short-term widening, long-term tightening

Barclays' strategists said this week that following the recent improvement in the PSNB requirement it now expects “gross gilt issuance of £230.8bn in FY23/24, skewed towards short and medium conventionals. The market should react favourably to a significant reduction in supply relative to earlier estimates, but the medium-term outlook has not improved greatly – this should be of greater concern to asset swap investors.”


Barclays said that given some pessimism about the market’s ability to absorb such a high level of supply, the market would likely be relieved if the remit ends up being in line with our reduced expectations.


However, it cautioned, “the medium-term fiscal profile might prove more significant than the remit. The DMO’s medium-term gross financing requirement forecasts are unlikely to improve materially from those presented in the Autumn Statement, as the factors determining the fiscal path have not really changed.”


Therefore, it concludes, “while a lower remit number for FY23/24 may be met with a relief rally and some asset swap spread widening, the lack of corrective impetus means that spread tightening and a steeper asset swap curve remain more likely over the medium term. A downward revision to the remit would mean that gilt issuance remains manageable for now, but… market sentiment can change rapidly.” Can’t it just?