GBP Swaps: Gentle bear-steepening as brakes applied; IL45 view

While US data led to more bear-flattening in USTs, gilts built on Friday's resistance to steepen as the F/E held firm. Strategists eye IL45 and MPC.

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  • Gentle bear-steepening as brakes applied

  • HSBC: Buy the new IL45 on ASW or versus EURi

  • BNPP: Big week of data for MPC, but rates still seen as peaked

  • New issues: Skipton


    Gentle bear-steepening as brakes applied

    Despite 2y gilt yields being dragged away from an early rally by USTs, which started to head north mid-morning, the GBP fixed income curve decisively defied the bear-flattening move in the UST curve today, against which it had fought valiantly on Friday (see Total Derivatives).


    Instead the curve bear-steepened with SONIAs little-changed and 2y gilt yields ending the day just a bp higher despite another day in which the UST market was again caught out by surprisingly upbeat data (this time strong Empire Manufacturing headlines), GBP fixed income seems to have drawn a faint line in the sand.


    The last week has seen the belly of the SONIA curve sell-off 25-30 ticks while 2y gilt yields have risen 28bps since April 5, but today there was a clear resistance to adding to these bearish bets. After dovish words from the BOE’s Tenreyro on Friday there were some hopes that the usually reticent Deputy BOE Governor Cunliffe might reveal his  inner thoughts on rates in comments today, but he restricted himself to discussing Stablecoins and digital pounds.


    Nonetheless, gilts shrugged off the 9bps sell-off at the front-end of the UST curve to seemingly settle for the edict – so often used and then ignored by this reporter – of ‘one more no more,’ with only the long end continuing to sell-off gently in the afternoon, either side of the BOE APF sale.  


    That new, upsized, £770m sale of medium-dated gilts by the BOE saw a strong £2.5bn of bids, with the most take-up seen in the 4.25% 2032 gilt where £307m of £1bn of bids were accepted, while the 0.375% 2030 saw £238m of £514m of bids accepted.  


    On the curve today there was modest bear-steepening across the curve, led by a SONIA strip that ended the day almost entirely unchanged, having done the hard work of pricing in a May hike last week. 2s/10s rose steadily to 9.2bps(+3.0) while 10s/30s drifted down from early steeps to end unchanged at 35.4bps.   


    In ASWs the 2y was -1.9bps at just 5.5bps, 5y was -1.3bps at 29.3bps, 10y was -1.1bps at -14.3bps and the 30y was -1bp at -58.7bps.


    Over in linkers and RPI swaps moves were also pretty muted, as illustrated by the RPI curve where the 1y closed +4bps at 3.99% and 30y closed +1bp at 3.39%.


    HSBC: Buy the new IL45 on ASW or versus EURi

    In their latest look at the linker market, HSBC strategists on Friday reminded us on that the DMO is set to launch a new linker with a March 2045 maturity in the week commencing April 24th.


    It expects the syndi to raise in the region of £3.5-4.0bn, adding that “cheap valuations provide a positive backdrop heading into the supply. At c.50bp, real yields in the 20-25Y sector are the highest on the curve and offer the highest z-spread. Yields may be lower than the 80bp level we saw at the start of March but they are still historically attractive.”


    HSBC contends that “the outlook for long-end UKTis very much depends upon what happens at the short-end of the curve, with changes in OIS forwards increasingly important in explaining changes in long-end real yields in 2023. We expect a choppy range-bound trading regime to give way to a more bullish outlook for duration in the months ahead as the BoE reaches the peak in Bank Rate.”


    However, it concedes that “given the ongoing volatility, outright real yield demand may be limited at the syndication. Investors may instead look to take advantage of attractive valuations by buying the new linker on the curve, on ASW or by switching out of close neighbouring maturities. The 25Y point is the sweet spot for LDI demand and we think these investors will target the syndication as a point of improved liquidity. Although the depth of their demand over the long-term is diminishing, clarity is beginning to emerge in terms of regulation which could pave the way for a rise in hedging.”


    And, concludes HSBC, “If history is a reliable guide… investors may not need to wait until the syndication itself in order to buy at the locally cheapest level. Given demand has been so subdued in recent months, any pick-up in activity means valuations are likely to richen from their current cheap levels. This would benefit our ‘buy 30Y UK real yields vs Euro’ and ‘buy 30Y UKT on ASW’ trade ideas.”


    The DMO announced on Friday that it has mandated BofA, BNPP, JPM and UBS for the syndication of the new linker due Mar 2045. 


    BNPP: Big week of data for MPC, but rates still seen as peaked

    Looking further into this week, but with half an eye also on the May MPC, BNPP strategists said pending data will be of key interest to that rate-setting group.


    "This week," said BNPP, "we will see a raft of data that the MPC have directly pointed to as a key focus in their policy deliberations. On Tuesday, we'll get the last snapshot of the labour market before the MPC's next decision. We expect unemployment to remain unchanged at 3.7% (consensus 3.7%) and pay growth to slow a little, but to remain far in excess of inflation-at-target rates. On Wednesday, we'll get March inflation data. We expect both headline and core inflation to fall back again after February's surprise uptick. We think that headline inflation will print 9.7% (consensus 9.8%) and that core CPI will come in at 5.7% (consensus 6.0%)."


    BNPP concluded by reiterating that "we think that at 4.25% the Bank Rate has reached its terminal level but we continue to see the balance of risks as skewed to the upside."


    New issues: Skipton

    • Skipton B/S is today holding investor calls ahead of the sale of a GBP-denominated 6y NC5 Senior Non-Preferred bond issue via Barclays, BNPP, NatWest and SocGen.