GBP Swaps: Food for thought; Fade the sell-off?

Shopping bags
Soaring food prices as served up by the BRC, and inflation-centric BOE comments set the tone for GBP underperformance. JPM is fading weakness.

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  • Food for thought; Gilts struggle  

  • JPM: Fade gilt sell-offs

  • New issues: Severn Trent


Food for thought; Gilts struggle

Sometimes often overlooked bits of second-tier data have a rare day in the sun, and today it was the BRC shop price index which posted an 8.9%yoy push higher in March at the start of trading today, versus a forecast 8.4%. This set gilt yields on an upwards path that saw the 2y benchmark yield swiftly rise to 3.39%, plus 7bps on the day and within 1bp of its subsequent intraday high.


The food component of the BRC index rose at its fastest pace the survey has reported at +15% from 14.5% in Feb, and the market only partially recovered as the day wore on, underperforming Bunds and USTs in a session where inflation fears were further nurtured by BOE Governor Bailey. He told a Treasury Select Committee that while the UK banking sector is safe from UJS regional bank contagion, inflation is very much an active concern.


But to be fair it was a calm session again, marked by Monday-level futures volumes (gilt futures 171K, SONIA futures firmly stuck in the 20-30,000s at the close as they sold off by 6-7 ticks in all but the firmly anchored front two contracts).


Yesterday saw some new issuance led excitement with Engie pricing a 30y, £650m deal at the same time that the long-dated final QT sale of the quarter was taking place, resulting in a tightening in 30y ASWs into the pricing, and contributing to a post-APF sale rally in the long end.


Today saw the GBP bond market in action again with a £400m, Mar 2036 Severn Trent deal which failed to impact on the slightly less thinly-traded ASWs in that part of the curve, with 2bps ranges seen in the 15y and neighbouring ASWs during a day that may not live long in the memory.


The slight focus on inflation saw front end RPI rally strongly and gilts nominal underperform, but as one market participant hopefully reminded Total Derivatives last night “it’s going to fall off a cliff very soon,” a view that continues to support slightly nervous investors who are walking on the bullish side of the street.


Shortly after the end of day gong was struck, the 10y gilt yield was +9bps at 3.45%, 2s/10s was +3bps at 10bps and 10s/30s was -4bps at 40bps. In swap spreads the 2y ASW was +3bps at 28bps, 5y was -0.4bps at 36.8bps, 10y was -1bp at -10.3bps and 30y was +0.7bps at -61bps. RPI swaps were +10bps in the front-end and +2bps in 30y.


JPM: Fade gilt sell-offs

Strategists at JP Morgan said in their latest look at GBP fixed income that while the market may still be tested by pockets of volatility after the events, price action and headlines of the last couple of weeks,  it feels that any risk-on reversal in yields will be temporary and recommends fading gilt sell-offs.


JPM said that “a large retracement of the risk-off rally is unlikely as downside macro-risks have increased… Any attempts (by regulators) to shore up bank liquidity concerns in the very near-term could lead to a sell-off in yields but our inclination would be to fade any large increase in UK yields.”


Looking at the GBP curve, at least the front of it, JPM adds that despite a decent flattening in the Jun23/Dec23 SONIA curve last week, it is still 50bps steeper than the equivalent USD OIS curve, and says the risk that the MPC has ended its hiking cycle commends flattening moves in that part of the SONIA curve.


New issues: Severn Trent, Engie

  • Severn Trent Water Utilities has priced a £400m, 5.25%, Mar 2036 Sustainability bond at gilts +175bps via Banco Santander, MUFG, NatWest (B&D) and Scotia. Books above £1.8bn.


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