GBP Swaps: Big moves, but calmer trading; Steepeners mulled

Big moves, but calmer trading; Steepeners mulled

With the clocks re-set for summer and the cold winter air finally feeling as if it may have blasted its last until Autumn, a sense of Spring serenity has started to seep into the swap desks of old London town.

At the 4:15pm close today the 10y gilt yield had moved 8bps higher to 3.36% (having peaked at 3.44% prior to the BOE QT sale), while SONIA futures fell as much as 17 ticks in the belly. But, as one active market participant said this afternoon, big moves aren’t always accompanied by swearing, shouting and interns being hit over the head with traders’ telephones.  

“It’s a calmer market today. There are big moves but only because the market was at levels where you need bad news to keep it bid, and there hasn’t really been any,” said the unruffled market participant. Reflecting on last week’s pop-up Deutsche Bank share sale, the source said “its CDS started to fall then its share price followed, but nobody knows why. Its market cap is in good shape, it’s just one of those odd things.” Indeed, Deutsche Bank is +4% today.

Volumes too are classically Monday-esque, leaving the above trader to ponder the big picture issues that have been such drivers of fixed income markets these last few years. Starting with supply.

With the new fiscal year arriving at the end of this week, the market participant looked at the supply calendars published on Friday. He noted that the DMO gilt calendar for Apr-Jun, which will see a syndicated new linker sale in the 5-25y area, plus a new 2063 conventional syndi, served as a reminder of the challenges looming for long nominals and linkers generally.   

“The DMO is going to sell a higher proportion of linkers and longs than expected. The proportion of long nominals is about 10% (in 2023/24) which is about the same as 2022/23. That amounts to £24bn or £10bn more than most people had predicted.”

However, pondered the source, “there’s not a lot you can do with that. It’s too early to short the long end because the market continues to be entirely macro-driven, with the shape of the curve, and therefore the pricing of longs, completely dependent on short-end moves, usually driven by risk-on, risk-off swings.”

And yet he said that as pension funds pour their gilt holdings into the pockets of the pension buyout companies “those insurers just look at gilt yields and sell them so they can risk-up. In the longer term it will be a struggle for longs.”

As for the influential front-end, the participant compared what’s happening here with the US, noting that “fingers’ crossed the UK doesn’t seem to have potential problems comparable to the regional banking sector issue in the States. So in the US there are just 11bps of hike priced into May, then 63bps of cuts by Dec and 100bps of cuts between Sep and Jun 2024. 

In the UK though he said that “there are 19bps (of hikes) priced in by May, 30bps by Jun and, cumulatively, 36bps by August. While the US has more visible banking issues than here, we’ve got more of an inflation problem with it skipping back above 10% (in the Feb CPI data last week). But most people, including a recent survey of twenty economists, think we are at the end of the cycle so there is scope for significant repricing if inflation falls off a cliff as it is expected to.”  

All of which points to a steeper curve at some point… just not quite yet.

As for today though, despite the pretty big moves, the source said that “futures volumes give a decent snapshot of how the market has been.” So far today the gilt future has managed about 230K of volume, which is about average, while SONIAs only broke 30K for Jun23 even with the reds losing 17 ticks.  

In swap spreads there was a gently mixed close, with the 2y ASW +0.5bps at 23.5bps, 5y was -0.7bps at 36.2bps, 10y was +0.2bps at -8.7bps and the 30y was -0.9bps at -61.3bps. And in gilts the 2y closed +10bps at 3.29%, the 10y closed +8bps at 3.36% and the 30y closed at +4bps at 3.81%.

Finally, supply today saw a similarly lacklustre ultralong QT sale. The BOE offer of £650m drew a modest 1.88 times bid/cover ratio, which while unimpressive is not problematic, according to traders.

The most-sold by far was the 0.625% 2050 gilt, with £456.5m sold out of (confusingly) £465.6m of offers. Since the BOE sale the yield on the 2050 magically rallied 12bps to 3.73% and is currently at 3.75%. A good day for the lucky buyer/s.  

The BOE announced Friday that it will hold twelve APF auctions of an increased £770m size in Apr-Jun, just to keep GEMMs on their toes.

Elsewhere, inflation performed well in the risk-on environment with RPI swaps 5-9bps wider led by the front end despite a small dip from session into the close, while linker real yields came down from the day's highs to end -1bp to +2bps with the long end in the green.  

BofA: Two-year gilts to lag SONIA

Reflecting on the increased expectations that the MPC has stopped hiking following last week’s 25bps dovish hike, strategists at BofA said that “stopping the hikes should be consistent with a steeper Sonia curve, as implied in our forecasts. Another hike in May could delay that dynamic towards the middle of 2023.”

They said they “continue to expect 2y Gilts to underperform relative to 2y Sonia and 2s20s Gilt ASW curve to steepen, on the back of significant skew shorter in Gilt issuance by the DMO from April. On 10 March, we recommended selling UKT 0.625% 2025 vs. UKT 3.5% 2045 on ASW at 129.5bp (on Z-spread OIS basis), targeting a spread of 70bp with a stop of 160bp.”

New issues: Engie, NGTRAN

• French energy company Engie is pricing a £650m 30y 5.625% Green bond at gilts +187bps via Barclays (B&D), HSBC, JPM and RBC. Books are up at £1.35bn.

   

• National Gas Transmission (Baa1/A-) plans EUR 7y and GBP 12y bonds (CORRECTS) via BNPP, Lloyds, MUFG, NatWest and RBC after meeting investors from Mar 27.