GBP Swaps: Deal pricing behind yield spike; 10s/30s LDI talk

Deal pricing behind yield spike

The threshold for what can be considered a dramatic day in sterling fixed income has been raised significantly over the last six months so today’s activity, which saw 10y gilt yields trade in an 11bps range can now be categorized as pretty humdrum.

Yields generally opened 4-5bps lower across the curve despite MPC member Mann’s warning of unpleasant-sounding ‘very sticky' inflation in a speech last night, and meandered along fairly happily until 1pm, when a quick spike higher became a 9-10bps sell-off within an hour, from 2y up to 30y gilts.

Rather than headline trading, one GBP swapper at a leading GEMM told Total Derivatives that “the spike higher felt like (hedge unwinds related to) deal pricing… possibly the United Utilities deal (see new issues below), I’m not sure.”

With a 5y maturity that bond was well positioned to spread across a fair part of the curve, while KfW also priced a 4y tap at lunchtime – closer to that 1pm spike in fact – that may have combined to adjust gilt prices lower.

But, the above trader noted, “at that point (lunchtime) gilts were outperforming for no fundamental reason so the move just clicked them back in line with other markets,” a point backed up by closing levels which saw the move in 10y gilts with a bp or so of the 4bps sell-off in Bunds.

10s/30s LDI and calendar talk

One of the persistent hot topics in gilts since the infamous Truss interregnum has been the future relationship between LDI and long-dated gilts. Will the love affair continue? Or is it single beds and no chat at breakfast from now on?

The news from the BOE FPC yesterday recommending LDI buyers of gilts should set themselves up to be resilient to a 250bps 30y real yield shock was below some forecasts of up to 400bps. It has been attributed as being supporting of 30y outperformance yesterday, and possibly in the run-in to the FPC's statement.

But the above senior trader was wary of over-egging the buffer pudding. While 10s/30s gilts has flattened a lumpy 17bps over the last five sessions, the trader said “the guidance for the leverage margin was set at the lower end of what most people expected… and less margin means more ability to buy gilts. I’m sure some people held back from buying gilts until the statement but pension funds are slow movers who don’t react straight away to this kind of thing though in the medium term its clearly a positive for demand from them.”

Instead, he said the strong outperformance of gilts is simply a repeat of a story older than time itself. “It’s month-end, quarter-end and year-end tomorrow and so what we’ve mostly seen in recent sessions is year-end buying from real money.” Others pointed to a brief pause in long end supply from the DMO. 

Beyond these elements of moves in yield and the curve today, the trader said that this was not especially a day to linger in the memory, while volumes of around 192K of gilt futures suggest that whatever was going on wasn’t in particularly massive size.  

Looking across the GBP fixed income curve, at 4:15pm today the SONIA strip sold off 6-8 ticks, or about 12-13 ticks down from their lunchtime highs. In gilts the 2y yield was +5bps at 3.44%, 10y was +4bps at 3.51% and the 30y was +2bp at 3.85%. In swap spreads the 5y was -0.3bps at 36.7bps, 10y was -1bp at -9.1bps and the 30y was -0.9bps at -59.0bps after cheapening sharply late in the session.

In linkerland, B/Es were firm again and finished +5-8bps at most points on the curve and real yields rallied by 4bps from 15y out to 50y. while RPI was +4bps in 1y to 4.22%, +5bps in 10y at 3.96% and +5bps at 3.45% in the 30y.  

New issues:

• KfW has priced a £300m tap of its 3.75%, July 2027 bond at gilts +58bps via BMO (B&D) and Santander.

   

• United Utilities Water Finance has priced a £300m, Oct 2038 5.1125% Sustainability Bond at gilts +135bps via Barclays (B&D), BofA, HSBC and NatWest.

   

• Commonwealth Bank of Australia has priced a £250m, April 2024, SONIA +45bps FRN via Rabo at par.