GBP Swaps: Strong linker auction light on thrills

Strong linker auction but no thrills

Traders sounded unsurprised today by a “not very exciting” but strong linker auction with the £900m reopening of the IL 2039 helped by a real yield and breakeven concession since the end of March, which offered dealers the opportunity to cover some shorts. The linker continued to cheapen on real yield and breakeven going into the reopening today before clearing at 0.334% - around 1.5bps through, according to traders - with decent bid to cover of 2.65.

The linker was then squeezed up to around 0.28% on the follow, leading to an additional £224m in PAOF issuance, before briefly rallying further as the US CPI data hit the screens, only to selloff back to around 0.33% (+2.1bps) just after close, outperforming slightly on RV. Traders said that inflation had taken a backseat to the US and traded largely with duration. By the end of the day, despite Brent futures rising to test $87, linker breakevens fell 3-4bps at the front end and rose by 2-3bps at the long end.

Shortly before the auction the DMO confirmed that it plans to syndicate a new linker due Mar 2045 in the week of April 24 followed a new conventional due Oct 2063 in the week of May 15. Both announcements were as-expected and, assuming evenly-sized syndications in 2023-24, the DMO’s plans imply roughly £3bn IL 2045 and £4.5bn 2063 launches.

Nearer term, there’s little chance for GEMMs to take a break given a £3.25bn auction of the 3.25% 2033 on Thursday, followed by £2.25bn of the 3.75% 2053 on April 18 and £3.75bn of the 4.125% 2027 on April 19.

In the news, BOE Governor Andrew Bailey focused his speech in Washington today on the health of the UK financial sector - including smaller institutions – in the wake of SVB, the appropriate level of protection for depositors and the case for a central bank digital currency. He didn’t address monetary policy and SONIA futures ended another 4-5 ticks lower in the reds despite post-CPI gains for their SOFR equivalents.

Gilt futures fell around 35 ticks and headed for the close just off session lows with 2s/10s a touch flatter at 6.2bps (-0.3) and 10s/30s edging up to 32.4bps (+0.6). Asset swaps were narrowly mixed but ended around 0.25-0.5bp cheaper led by the front end. In issuance, Dexia Credit local priced a £500m 3y deal.     

NatWest: Gilts to see suffer further underperformance against USTs

With gilts turning in a mixed cross-market performance after the US inflation data, lagging USTs by a few bps in 10y but outperforming Bunds, strategists at NatWest believe that further underperformance against Treasuries lies ahead, for a number of reasons. They explain:    

• “As the weight of gilt supply shifts further down the curve, the natural buyers of those gilts still don’t materialise, and as expectations of Fed policy shift dovishly and money market funds exert further downward pressure on front-end treasuries, we expect this cross-market underperformance has further to go. We continue to like being short 10y gilts vs 3y Treasuries.

   

• “This week sees taps of the IL39 and 3Q33s, followed by a medium QT auction and the 3T53s the week after, after which focus will shift to the 25y linker syndication. More broadly, we expect the heaviness of supply this fiscal year to weigh on gilts, which should trigger further underperformance both on a cross-market  basis and on asset swap.

   

• “Although we think there is scope for private investors to take down more gilts than they have in the past, this should not be overstated. The overall size of UK money market funds is significantly smaller than in the US (naturally), but they also invest in a much smaller proportion of  government debt. UK money market funds hold around 1.6% of their assets in treasury debt, and 6% in treasury repo.

   

• “The narrative that the BoE’s publication of its recommendations for minimum levels of LDI resilience would be a trigger for LDI activity is a red-herring, but nonetheless may have spurred some long-end demand from other sectors in the market in (false) anticipation of LDI buying (last) week. In reality, LDI activity is unlikely to return for at least another few weeks (and more likely, well beyond that) as we await publication of further details and enforcements from the regulator.”

New issues

• Dexia Credit Local today priced a £500m short 3y 4.375% at gilts +92bps. Leads are Barclays (B&D), HSBC and NatWest.