GBP Swaps: Long end underperforms after 10y auction

Steepening 5 Jun 2020
The long end underperformed and 10s/30s gilts steepened following a well-covered 10y auction today and non-committal comments from the BOE's Pill.

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  • Long end underperforms after 10y auction

  • More house price weakness to come: NatWest

  • New issues: CIBC, CBA, BMO floaters


    Long end underperforms after 10y auction

    Narrow ranges for gilts today saw the future eventually close just eight ticks firmer in mildly below-par volume of 179K. Shorter in, SONIA futures were unperturbed by BOE Chief Economist Huw Pill’s comments and the strip hit session peaks after Pill signalled that the Bank continues to expect a fall in inflation after 11 interest rate hikes. SONIAs finished 0.5-2.5 ticks firmer after three days of losses.


    Along the curve, gilts 2s/10s steepened a touch to 7.1bps (+0.8) but the big move was at the long end were 30y yields rose by 4bps and the 50y gained 6bps, bear-steepening 10s/30s to 36.7bps (+4.3) and 30s/50s to -42.3bps (+1.8). The move came after the DMO sold £3.25bn in 2033 gilts with high bid/cover of 3.04 and follows the sharp flattening in 10s/30s through late March and early April.


    Ahead, next week’s auctions are for £2.25bn of the 3.25% 2053 gilt and £3.75bn of the 4.125% 2027.  Gilt asset swaps finished a touch richer at 33.8bps (+0.7) in 5y, -9.7bps (+0.4) in 10y and -55.1bps (+0.7) in 30y.  


    In inflation, real yields bear-steepened with nominals as the short end outperformed with cash breakevens 2-3bps wider at the front and unchanged at 3.39% in 30y, after testing 3.41%.   


    More house price weakness to come: NatWest

    Better news from the housing market – the RICS prices balance rose by four percentage points albeit only to -43%, and a BOE survey found an improvement in mortgage availability and house price expectations – was countered by mildly gloomy new forecast from NatWest today.


    The bank predicts a peak-to-trough decline in UK house prices of 11.25%, of which it estimates  “over one-third” has already occurred. Incredibly, its forecast of further weakness in house prices may even include certain undervalued South West London postcodes.


    That 11% UK drop translates into falls of 6.2% in calendar year 2023 and 3.2% in calendar year 2024, following near double-digit price gains in 2022. And even an 11% fall from the peak would only return the level of house prices at the end of 2024 to “where they were in  summer 2021 – a material correction but significantly milder than the global  financial crisis experience and certainly more benign than the early-1990s crash,” according to the bank.


    Still, NatWest sees the risks to its forecast as “tilted to the downside,” given that pass-through from BOE Bank Rate rises to mortgage debt-servicing costs is estimated to be only around 20%.


    New issues: CIBC, CBA, BMO floaters

    • CIBC today priced a £200m 1y FRN (EMTN) due Apr 2024 at SONIA +55bps. Leads is Commerzbank.  


    • CBA yesterday priced a £265m 1y FRN (EMTN) due Apr 2024 at SONIA +47bps. Leads is Rabo.  


    • BMO yesterday priced a £247m 1y FRN (CD) due May 2024 at SONIA +56bps. Self-led.