GBP Swaps: ECB tempers bullish spirits; B/Es steady; Dovish HSBC

Swiss regulatory gnomes
Gilts rallied into the ECB then sold off, tracking USTs all the way as they ended the day with almost-normal-looking price changes. HSBC stays dovish.

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  • ECB tempers bullish spirits; B/Es steady

  • HSBC: Still dovish after all those gilts; Last take on Budget

  • New issues: Deutsche


    ECB tempers bullish spirits; B/Es steady

    Yesterday saw gilts track USTs rigidly as the gnomes of Zurich darted about trying to ensure they could keep a lid on any trouble emanating from their grotto. Today it was a similar story as the Credit Suisse story and the ECB announcement this afternoon kept things nervous.


    Today though was same, same, but different, as they used to say in Thailand, with gilts following the UST moves (flatlining, rallying hard, then a late partial sell-off), although the direction of travel was this time set by the ECB. Optimism that it would temper its hawkish ways grew heading into the ECB announcement and meeting. It was then dashed via a 50bps hike, sending 10y UST and gilt yields about 10bps higher thereafter. Bunds, it must be said, also trod a similar path but with marginally bigger swings.


    As for yesterday's gilt remit announcement in the UK, despite mutterings to the contrary,  it wasn’t a market mover. As NatWest strategists subsequently said: “Given the volatility in markets this week driven by other, global factors, a gilt remit that comes this close to consensus is unlikely to materially alter the direction of travel in yields.”


    So the story remains one of risk-off battling it out with risk-on, depending on headlines to decree which is on top, with the added bonus of the ECB. One gilt trader said “there’s been nothing surprising in the reaction of gilts today. As there’s been no clear sign of contagion today the markets remain on alert but gilts quite reasonably bear-flattened on the ECB.”


    That they have. At the 4:15pm close the 2y yield was +5bps at 3.33%, 10y was +3bps at 3.35% and 30y was also +3bps at 3.78%. This is a wildly temperate day-on-day move after a week which has seen 2y yields trade in a 70bps range, and which currently sees them standing 18bps from the bottom of that range. Swap spreads were pretty sensible too, with 2y ASWs unchanged at 37.4bps, while 5y, 10y and 30y were all around 3bps lower on the day as gilts lagged.


    Gilt futures volumes were average at a little below 200K, while the belly of the SONIA curve was the big mover, with a 15-tick net drop versus yesterday’s close after falling 20 ticks on the back of the ECB. But with that SONIA belly still 70-80 ticks up on where it was a week ago, SONIA bulls won’t be too alarmed.


    The nominal gilt temperance spread to linkers with breakevens unchanged or -1/+1bp only at the key curve points. In linkerland only 1y RPI stepped out of line via a 12bps rise to a still-lowly 3.66% on the back of some cold weather-related bumps in struggling gas prices (isn’t summer meant to be on the way? Please.).


    Elsewhere, there was decent interest in 30y RPI/IL2051 B/Es which traded a few times around the 2.5 and 2.75bps area, but in terms of outright the real yield curve has restricted itself to headline trading, while ignoring some mutterings that the DMO could yet surprise on the upside regarding linker issuance as 2023/24 gets rolling.


    HSBC: Still dovish after all those gilts; Last take on Budget

    For one last backward glance at yesterday’s Budget, and what it means for GBP fixed income, we look at HSBC’s relatively upbeat take, published late yesterday.


    In summary, HSBC said the DMO’s announcement of a gilt remit of £241.1bn for 2023/24 “broadly met market expectations. It evidently sought to balance the challenge of a large financing requirement while managing the government's near-term exposure to refinancing risk and seeking to avoid large concentrations of redemptions in one year. With supply skewed away from longs, mediums face a higher burden and short-dated gilts issuance remains elevated.”


    Looking ahead, HSBC said that:

  • The end of hikes is near. The Budget provided a slight distraction for gilt investors amid ongoing financial market volatility. But the outlook will remain largely at the mercy of what the BOE does next week - and beyond. Central banks are stuck between their inflation and financial stability objectives. Today's fiscal event is unlikely to do much to impact the upcoming decision. This will be determined by how the MPC balances concern about ongoing financial market turmoil and the risk of overtightening... A hike next week is viewed as a coin toss, but, whatever happens, an end to tightening in the near term seems inevitable.”


  • No rush to buy, but look to add duration on weakness. Even though supply pressure remains high, the end of hikes is likely to support gilt demand. Nevertheless, some consolidation is probably due after the recent rally. Volatility is likely to persist, so our preferred strategy is still to look to add duration on any weakness. 10-year yields may be much lower than the near 4% level where we turned bullish - and are close to our end-Q2 target of 3.25% - but our end-2023 forecast of just 2.5% underpins our view that gilts offer long-term value.


  • We retain our bullish gilt trades. Consistent with our bullish bias, we already have open trade ideas on receiving GBP 1Y1Y OIS and buying gilts 5Y5Y forward. Both trade ideas have both been moving towards their target levels and we retain them.


    New issues: Deutsche

    • Out of the most barren of issuance landscapes did this afternoon Deutsche Bank AG London unexpectedly appear. The £5bn, 3.974% deal was, admittedly, only an FRN, priced at par to yield SONIA flat, and it was self-led. But they all count. Well done Deutsche for ending the drought.