GBP Swaps: Gilts trim gains as GSIBs' CDS come back

BOE Threadneedle street Oct 2022
Gilts pared gains from mid-morning as bank CDS came in from early wides, after pressure on a range of GSIB names began to ease.

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  • Gilts trim gains as GSIBs' CDS come back

  • Barclays: Look for front end flattening as terminal rate approaches

  • New issues: Wessex Water


    Gilts trim gains as GSIBs' CDS come back

    The gilt future swung in a big 181-tick range today, testing session highs along with Bunds and Treasuries as pressure on European bank CDS and shares mounted from the open, before losing ground through the afternoon as the selloff in GSIB financials began to ease. Even so, Deutsche Bank shares still fell a chunky 3.8% having been 11.6% weaker at their nadir, while Deutsche’s CDS widened by 13bps to 202bps. Barclays shares lost 4.2% and its CDS widened by 11.5bps to 133bps. German Chancellor Olaf Scholz felt the need to wade into the turmoil in order to pump up Deutsche, describing the bank as “very profitable” with “no need to worry about anything”.      


    That may be wishful thinking – First Republic shares were also off the lows but the bank is hardly in the clear – but the recovery in bank stocks and the pullback in other key fear/funding  indicators allowed gilts and SONIAs to pare gains. The latter rose 1-4 ticks in the whites versus 4-5 ticks in the reds and greens, ending 20bps off session highs and lagging behind the double-digit rise in EURIBORs. The gilt future rose 66 ticks in decent volume of around 235K.   


    The bull-steepening in gilts was also less marked than in Bunds with gilt yields ending 7-9bps lower led by the 5y at 3.12%. Both 2y and 5y gilts rallied through 3% at one point before yields rose steadily from mid-morning onwards. 2s/10s bull-steepened to test 14bps early doors but had flattened back to 8.8bps (+0.4) at the close, while 10s/30s was more stable, hitting 49.9bps before coming down to 48.4bps (+1.3).


    In supply news, in addition to Wessex Water’s brave 9y deal, the DMO this morning released its supply calendar for the Apr-Jun quarter (link). RBC highlights that the market will get to play with as many as four shiny new gilts during the quarter including a 5y in June, a 40y via syndication in mid-May, a 10y linker in June and a 15-25y linker via syndication in late-April.


    Later in the day the BOE published its Market Notice for APF gilt sales in the coming quarter (link). The Bank intends to sell a total of £3.08bn in each of the short, medium and long maturity sectors during Q2 (£9.24bn in total), spread across four £770m auctions in each sector. Auctions will commence on 3 April for short gilts, 17 April for mediums and 4 May for longs.


    Gilt asset swaps were mostly narrowly mixed, ending near session tights. 10y spreads widened a touch to -8.9bps (+0.8) and 30y widened to -60.4bps (+0.2).


    Finally, linker real yields bull-flattened with the long end strongest even after rising by 10bps from session lows along with nominals. 30y real yields fell by 8bps to 46bps and breakevens widened by a couple of bps. Losses of 3-5bps at the front end helped to steepen the breakeven curve after flattening sharply over the last few days in the wake of the strong RPI data and dovish BOE meeting. 


    Barclays: Look for front end flattening as terminal rate approaches

    The BOE MPC’s updated forecasts show stronger growth alongside confidence in falling inflation. That  suggests 1y1yf is rich in RV while 1y2yf is cheap since Committee is “incrementally closer to the end of what is proving to be its most aggressive tightening cycle”, according to rates strategists at Barclays. They explain:


      “The lags in policy mean that the effects of tightening have yet to be felt in the economy. The inference from the minutes is it will not take much for more of the majority who voted for a 25bp hike to migrate to the hold camp.”


      “The market is currently pricing a terminal rate of around 4.50%, with the peak in the cycle reached around the August MPC meeting. There is little doubt in the market that the MPC is now firmly in restrictive territory, so more tightening would only drive further inversion.


      “A simple measure of the ‘policy premium’ – the spread between the current policy rate and GBP 5y5yf OIS -…is as inverted as it has ever been, at around -130bp…The market is now at levels that have not been seen before, not even in the interest rate cycles of the 2000s…This means that the repricing in the market should move away from the immediate cycle and pricing of the peak to a more involved debate on pricing the timing and pace of easing.


      “In previous cycles, the MPC typically cut around 4-12 months after ending its tightening cycle…The market is now likely to focus more on the amount of easing that is priced to bring the overall policy stance back closer to neutrality….In RV space, this shift in the terms of the debate to easing will place the longer part of the money market curve under scrutiny.


      “There have been contrasting moves in the 1y gap flys, with GBP 1y1yf richening as GBP 1y2yf has cheapened. This divergence is likely to persist until the market settles on both the terminal level of the policy rate in the cycle and how quickly that rate will return somewhere closer to neutral.”


    New issues: Wessex Water  

    • Wessex Water (Baa1/BBB+) today priced a £300m long 9y unsecured Sustainability bond at 5.125% to give 205bps over gilts. Leads are Barclays, HSBC and NatWest (B&D), while books were above £900m.