GBP Swaps: Inflation pop hits SONIAs, flattens curve

BOE Sunny 9 Jun 2022
An unexpected rise in inflation ahead of Thursday's BOE decision whacked SONIAs and flattened the curve as the market re-priced a 25bps hike.

Start a free trial to read this article

Join today to access all  Total Derivatives content and breaking news. Already a subscriber? Please Log In to continue reading.

Or contact our Sales Team to discuss subscription options.

Get in Touch
Blurred image of Total Derivatives article content


  • Inflation pop hits SONIAs, flattens curve

  • BofA: 25bps and done, no cuts before 2024

  • New issues


    Inflation pop hits SONIAs, flattens curve

    With RPI trading in the reset market at 13.36% late yesterday, this morning’s 13.8% outturn rippled through both the inflation and nominal curves as the chances of a 25bps hike were shunted back up to around 90%, from the 50-60% range yesterday. Other measures of inflation were equally BOE-negative as headline CPI rose to 10.4% and core CPI accelerated back to 6.2%. Overall, the data left the RPI swap curve flatter and (mostly) higher on the back of a 29bps jump in 1y RPI to 3.79% while 30y fell a bp to 3.25%.


    In SONIA, futures saw volumes of over 68K in the front white but the largest selloff was in Dec23, which dropped by 37.5 ticks. The strip now implies BOE Bank Rate at around 4.53% at the end of 2023 versus today’s level of 4%, while Jun24 is implying Bank Rate at 4.13%.      


    Further out the curve, gilts bear-flattened while underperforming Bunds and Treasuries, the latter ahead of the FOMC meeting. The gilt future slid to test 103 around lunchtime before coming back to 104.15 at the close as USTs rose into the Fed decision, leaving the gilt down 70 ticks on the day.


    In supply, a £3.5bn reopening of the Jan 2027 gilt was digested at 3.746% with bid to cover of 2.27. After selling off to 3.79% on the follow against a backdrop of post-sale 5s/10s bear-steepening, the 2027 finished around 3.73% while 5s/10s ending 7.4bps flatter at 8.2bps.


    That flattening extended right along the curve with 2s/10s pulled back into negative territory at -3.0bps, around 13bps lower on the day. Long  gilt yields rose by around 4bps and 10s/30s flattened by 4bps to 43.4bps.       


    Finally, with announced IG issuance so far still absent from the screens for both sterling and euros, asset swaps ended mixed with 5y cheaper  at 33.5bps (-3.0) while 10y widened to -8.5bps (+1.5) and 30y was little-changed a -60.2bps.     


    BofA: 25bps and done, no cuts before 2024

    Writing before the release of the inflation data, analysts at BofA expected a 25bps BOE rate hike on Thursday accompanied by “dovish guidance” from the MPC. Ahead, BofA looked for no further hikes after this week, as they explain:


      “The UK economy has been driven by 4 large supply shocks: energy; supply-chain disruptions; Brexit; workforce sickness. The first two of these have been easing, opening up an easier path back to target. Easing supply shocks is consistent with the stronger growth and weaker inflation.”


      “In our base case of a 25bps hike, we would expect perhaps a 6-3 vote, meaning one more voter shifts to preferring rates on hold than in the previous meeting. If the BOE kept rates on hold it could be a close to unanimous decision, perhaps an 8-1 or 7-2, with mixed data and banking issues dominating. There may be an outside risk of one rate setter voting for a cut or signalling that they would be minded to do so soon.”


      “We had previously described the UK as having the greatest inflation persistence problem. As a result, we do not expect a rapid turn to rate cuts, forecasting two cuts next year, even though we think March will signal the end of the hiking cycle. That view is of course predicated on credit conditions not tightening sufficiently or fast enough to drive much weaker growth than we expect (we still forecast a mild recession). We, like the BoE, will need to watch the evolution of the banking sector problems.”


    New issues

    • Bank of Nova Scotiatoday priced a £200m FRN due Mar 2024 paying SONIA +50bps. Self-led.