GBP Swaps: Are gilts creaking already? Linker syndication talk

Supply continues to cause concerns in nominals. RBC eyes the looming 15-25y linker syndication.

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  • Are gilts creaking already?

  • RBC expects a new IL45, to come at a spread of +4-5bps to the IL44

  • New issues


    Are gilts creaking already?

    It is of course all of our patriotic duties to buy gilts whenever we have some unallocated loose change, especially now that Spring is arriving and heating bills are falling, and to offer moral, as well as financial, support to the DMO and BOE in their gilt-selling activities, as well as financial.


    But for market participants at the frontline of the ongoing QE unwinds and record DMO remit action, occasionally a note of constructive concern can perhaps be tolerated? One market participant with a long active history on the GEMMs frontline, told Total Derivatives this afternoon that the Herculean challenges facing buyers and sellers in 2023/24 are already making themselves felt.


    Why are 10y gilts underperforming Bunds and USTs today (by 0.5bps and 1bp respectively after another choppy day of trading)? The source said that “it seems a bit odd given the very strong auction this morning (£2.25bn of the 2039 attracted decent bid-cover of 2.58 earlier), but the market is very aware of supply tomorrow (£3.5bn of 0.5% 2029s) and after tomorrow.”


    “The DMO has eighty-six yards of short gilts alone to sell and then you’ve got BOE holdings in the mix. It could be tough,” he said, hastily adding that “they will sell them all of course, but it’s about what level they will sell them at.”      


    He added that there is a notable tendency amongst gilt investors to be short the front-end of the gilt curve versus USTs because of the front-loaded nature of gilt issuance this year, adding that this made sense, but was perhaps a risky expression of those concerns because in current market conditions the spread between the two could happily swing 50bps in either direction “if the world blows up.”


    “It’s poor as an outright trade as UK cash is looking relatively illiquid at the moment, and there’s the 2029 (gilt) issuance coming tomorrow,” he added.  Once again 10y gilt yields traded in a double-digit range today as they sold off gently before and after the DMO supply and then rallied on 3pm US data, particularly the slightly soft JOLTS job numbers.


    Elsewhere, market participants said there was little to report beyond a lack of liquidity making it hard to explain moves in various parts of the GBP fixed income curve. In the front-end, with 2y gilts trading in a 12bps range today on fluctuating rate expectations and those US headlines, some market participants say intraday moves are not a great guide to underlying views on ASWs and will likely remain particularly poor until after Easter. SONIA futures rose by 1-6 ticks in the whites and reds amid speeches from the BOE's Tenreyro and Pill.   


    Late in the session the 2y ASW was -4.7bps at 21.6bps, 5y was  -0.1bps at 32.2bps, 10y was -0.1bps at -10bps. Outright, 2s/10s gilts bull steepened by 4.5bps but 10s/30s still managed to flatten by about another bp. In inflation, breakevens did a bit round-trip with 30y opening at 3.42%, rising to 3.47% then falling back to 3.43% at the close, little-changed on the day.  


    RBC expects a new IL45, to come at a spread of +4-5bps to the IL44

    Strategists at RBC today took a look ahead to this month’s 15-25y syndicated linker sale. It said that the event is widely expected to take place on April 25, adding that a sale of a new 22nd March 2045 linker stands out above other options.


    Why? RBC said that “within the 15-25y sector, the biggest gap that currently exists is between the IL44s and IL46s. The exact midpoint between these two bonds is the 22nd March 2045. Secondly, the 22nd March 2045 is the exact midpoint between the IL39s and IL51s (the two closest ‘on-the-run’ bonds surrounding the 15-25y sector) with both bonds still only around halfway through their respective tapping cycles. Thirdly, there are no linker redemption in fiscal year (FY) 44/45, with the total redemption profile (conventionals + linkers) also looking relatively light in FY 44/45. Lastly, the DMO has recently favoured a 22nd March maturity date (e.g. IL73s, IL39s and IL51s.”


    And looking at other key factors on syndication day, RBC said that:


  • "Size: The FY 23/24 Remit showed that the DMO plans to raise £9bn via 3 transactions in its linker gilt syndication programme – implying an even flow transaction size of £3bn. At current market prices, this would equate to a nominal transaction size of £2 to £2.25bn and will bring around £6.5mn/bp of DV01 to the market – significantly less risk than the IL73s syndications.


  • "Reference bond: The DMO typically choses the closest shortest bond as the reference bond to a transaction. We have therefore assumed that the IL44s will be the reference bond.


    RBC sees a shift to a 0.25% or 0.375% coupon for the new bond. Fair value for an IL45 is estimated at around +3bps versus the IL44. And including a 1-2bps new issue discount gives a pricing spread of about +4-5bps over the IL44.