GBP Swaps: Long-end re-flattens; Citi on LDI demand

Long-end bull-flattens as new quarter kicks off

Whippiness was a feature again of the GBP gilt market today as the liquidity dried up a little ahead of the Easter break and binary market drivers were able to land sharp blows in both upwards and downwards directions.

Today’s first blow was landed by BOE Chief Economist Huw Pill whose interview published in a Swiss newspaper this morning helped already-ascending yields on their way by warning that the BOE will do what it takes to battle ‘too high inflation.’

That supported 2y gilts to their yield high of 3.5175% in the morning, before a period of narrow 3.45-50% range trading ensued, remaining in place until UST rally took off after the open and extended after the data, dragging yields everywhere down with them.

In the long end, flattening returned with 30y yields were down as much as 10bps at the close and 10s/30s a couple of bps flatter. Speculation last week that PFs, aflush with new fiscal year money, would buy longs today appeared to come true as 30y outperformed in dry market conditions.   

One market participant said, as lunchtime approached today that gilt futures were only trading at just 61% of its 10-day average volumes, and he would have been unsurprised to see it close with paltry volumes of a little over 150K.

But while the market was mostly thin and whippy, those who believe that positions have started to shorten up in the last couple of weeks will have felt a slightly validated by strong bids for cash gilts in the afternoon.  

The BOE gilt operation was greeted with a decent 2.55 times bid/cover for its 2.45pm sale of short-dated APF gilts, with the 0.125% 2028 and the 1.625% 2028 gilt standing out from the crowd, The former gilt saw the most accepted bids, £316.9m from £505.4m, while the latter saw £151.6m of £289.3m of bids accepted. The 0.125% 2028 closed at 3.31%, having priced around 3.37%.

Buyers significantly benefitted from the UST-led rally 15 minutes after the APF operation, which was triggered by soft US ISM data that turned the UST market from mildly to aggressively bullish, dragging all major bond markets with it. 

And talking of supply it was a very strong day for GBP non-government bond issuance with the EIB and CIBC both selling £750m of shorter-dated 3-5y bonds, while Center Parcs and TP IPAC plan slightly longer-dated ones. Asset swaps closed 3-4bps cheaper in the front end with the 5y at 32.3bps. 

Traders last week said that a slight shortage of GBP bond issuance following the SVB/CS/Deutsche Bank market interregnum and a desire by borrowers to beat the Easter shutdown, as well as acceptable basis swap levels for cross currency issuers, could bode well for GBP supply this week. And so it has come to pass.  

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Shortly after the 4:15pm close today the benchmark 2y gilt yield was -7bps, 10y was -10bps at 3.41% and the 30y was -4bps at 3.42%. SONIA futures rallied by as much as 19 ticks in the reds but in low volumes of 20-25K.  

Citi: 10s/30s to steepen despite LDI latest

Strategists at Citi reflected on what they called “tentative good news for LDI demand for the long-end” last week. Namely the FPC’s publication of its view that the long-term level of resilience of LDI funds to 30y real yield shocks should be a minimum of 250bps, lower than some expected.

Overall, “the FPC judged that their recommendation was broadly consistent with current levels of resilience (around 300-400bp). Still, it gives clarity and may give room for some funds (with excess resilience) to add long-end gilts/linkers. That was certainly the market’s initial response with 10s30s gilts flattening sharply (likely helped by financial year-end) and long-end real yields and break-evens rallying.

Longer-term, however, this does not change our structural view for a steeper 10s/30s gilt curve (Jul51 vs Jun32, 44.6bp 16:45 BST 30Mar23) targeting 85bp – despite the recent flattening momentum and light near-term supply.”

New issues: EIB, CIBC, CPUK, TP ICAP

• The EIB has priced a £750m, 3.875%, April 2028 bond at gilts +51bps via BMO, Barclays, NatWest and RBC. 

   

• CIBC has priced a £750m, 3y FRN at SONIA +63bps via Barclays, CIBC, HSBC, Lloyds and NatWest.

   

• Center Parcs funding vehicle CPUK Finance has mandated Barclays and HSBC to lead a £648m two-tranche Senior Secured Aug 2027 and Aug 2031 bond issue following investor meetings.

   

• TP ICAP has mandated BofA, HSBC, JPM, Lloyds and HSBC to lead a £250m 7y bond issue following investor calls.