GBP Swaps: US weighs on gilts; Swaps and linkers outperform

US weighs on gilts; Swaps and linkers outperform

Gilts tracked Treasuries lower this afternoon following hawkish Fedspeak and an unexpected jump in US consumers’ near term inflation expectations. However, in contrast to the Treasury curve’s big 2y selloff and marked bear-flattening, gilt yields rose almost in parallel with 2s/10s only around a bp flatter at 6bps, while 10s/30s pared initial steepening to finish about a bp lower at 35.4bps.       

Gilt futures fell by almost a point and SONIAs were effected by the plunge in SOFRs with the reds down 9-10 ticks, almost as much as the drop in SOFRs and more than the 7-8 tick fall in EURIBORs.

Short gilt yields backed up by around 10-11bps and gilts underperformed swaps across the curve with 5y asset swaps 3.5bps cheaper at 30.3bps, while 30y asset swaps fell by 2.8bps to -57.9bps.

In inflation, confirmation of the four leads for the syndication of the new IL45 later this month was followed by linkers outperforming nominals across the curve today but led by the front end. Cash breakevens widened by 2-8bps while real yields bear-steepened by 1-5bps.         

BofA: Supply supports ASW steepeners and B/E longs - even if LDI moves slowly

BofA research this week looks ahead to impact of The Pension Regulator’s (TPR) detailed LDI guidance, due later this month.

The bank reckons that LDI will be “slow” to adjust its behaviour even after the TPR's LDI update is out. But it believes that supply considerations still support holding 2s/20s ASW steepeners and breakeven longs. BofA explains:

“Were the TPR to agree with the FPC's recommendation (for a minimum 250bps LDI stress test) in its Annual Funding Statement, one could draw a quick conclusion that some excess capacity held by some LDI could return to long-dated nominal and/or inflation-linked Gilts.

 

“But we think TPR new rules, when published, will be quite complex, so implementation might take time. Until then, LDI funds will still need to meet emergency resilience tests.

 

“Time allowance to pass resilience tests will be important also. For instance, if an LDI account can, at a given point in time, meet the requirement but then yields move sharply, in such a way that the fund can no longer meet it, how much time would it be allowed to restore resilience?”

Turning to supply, BofA estimates that gilt issuance will be skewed “significantly shorter” as well as being much larger in 2023-24 compared to 2022-23. Supply of sub-7y gilts will pick up, particularly versus 20y+ gilts, it suggests:

“Short-dated Gilts have cheapened relative to Sonia significantly, while the long-end gilts have cheapened slightly. We think the former has scope to cheapen further, while the latter should be supported by the supply picture ahead…Even if LDI is slow to adjust to new TPR guidance, the gilt supply picture should still be supportive of 2s/20s ASW steepeners.

 

“Similarly in inflation, even if LDI are slow to adjust to new TPR guidance, we noted previously that net linker supply in fiscal year 2023/24 will be modest, while that for nominals will be very large indeed. This should underpin breakevens and weigh on iotas.”

New issues: IL45 syndicate, Toronto Dominion FRN

• The DMO has mandated BofA, BNPP, JPM and UBS for the syndication of a new linker due Mar 2045 to launch in the week beginning April 24.

   

• Toronto Dominion today priced a £600m 1y FRN (EMTN) due Apr 2024 at SONIA +52bps. Self-led. Note that a range of non-domestic banks have sold around £1.3bn in short-dated sterling FRNs this week, after £1.3bn last week.