GBP Swaps: Popular auction leaves eyes to focus on CPI and RPI

Balloons 9 Jul 2020
A strong DMO auction lifted spirits ahead of the big one, inflation, which may well have gilt traders reaching for the spirits.

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  • Popular auction leaves eyes to focus on CPI and RPI

  • More means less in the gilt market

  • New issues: Skipton


    Popular auction leaves eyes to focus on CPI

    It was a case of happy days when the DMO came to market this morning, delivering to an otherwise grey, cold and generally miserable London a splash of good cheer ahead of what is being considered a crucial bit of inflation data tomorrow.  


    The DMO sold £2.25bn of the 3.75%, Oct 2053 gilt at a yield of 4.083%. It received a strong bid/cover of 2.5 times and came halfway through a gilt rally that had already seen the 2053 yield drop from 4.105% just before 10am to that 4.083% auction level a few minutes later.


    It then went down all the way to 4.045%, before some profit-taking and general market softness saw the yield edge higher in the afternoon and to a closing level of 4.085%. Similarly, 10s/30s got down to 33.2bps on the follow but came back from mid-morning to close little changed at 35.0bps. 


    One active market participant said this afternoon that “it was a strong sale. It sold off going into it – and came at the cheap end of its (4.09% to 3.74%) range since Mar 9 – but then at the auction it came 20 cents through mid which is a pretty strong bid. It was a very solid auction.” 


    “It’s all about tomorrow,” said the above source, “it will likely cement a May hike of 25bps but will it be a hawkish hike or more benign? That’s what people, are worried about going into CPI.”


    The last two days though, said the source, have been a microcosm of life since the March panic. “There’s really nothing standout going on,” he said, “what you see in this, and other, (fixed income) markets, is sharp rallies when things are going wrong, and long, slow sell-offs when they aren’t. We’re in that mode at the moment.”


    This relatively stress-free affair cleared minds ahead of bigger challenges to come. Today saw average weekly earnings clang in early today at +5.9% for Feb versus a forecast of 5.1%. Tomorrow sees Mar CPI and RPI hit the screens (Bloomberg consensus forecasts 9.8% and 13.3%/366.6 respectively) and if the Feb earnings data is a bit passe, anyone UK-based who has set foot outside in the last months or so will understand why the market is nervous ahead of tomorrow’s data. The reset market traded March RPI last at 13.35% (366.7) today according to the SDR, close to the Bloomberg median and down slightly from 13.385% (366.8) early Monday.


    Elsewhere on the curve the 2y gilt closed +8bps at 3.67%, 10y was +6bps at 3.74% and 30y ended +5bps at 4.09%. In ASWs the 2y was +2.6bps at 8.5bps, ,10y was +0.9bps at -13.6bps and the 30y was +1.1bps at -57.6bps.


    Over in RPI, inflation swaps mostly dropped though 1y RPI was unchanged at 3.99% , 10y was -6bps at 3.83% and the 30y was -7bps at 3.32%. Real yields sold off by 11-12bps in parallel. 


    More means less in the gilt market

    As the Corona pandemic started to definitively ease off in late 2021, some GBP swappers suggested to Total Derivatives that the UK government might be tempted to stoke up inflation wherever it could in order to make the inevitably increased debt mountain diminish.


    As it turned out, Putin stoked it up for everybody so the UK government didn’t have to. Today, strategists at brokerage Tradition picked up on this theme in a topical piece ahead of CPI tomorrow.   


    Tradition said that “At the end of 2019 the nominal value of the UK’s debt portfolio (uplifted for inflation) was £1,673bn and by the end of December 2022 it was £2,335bn following heavy issuance during the pandemic. As for the market value, however, this was £2,272bn at the end of December 2019 and had fallen to £2,136bn by the end of 2022.”


    “Despite all the issuance over three years, the market value of the debt fell; another way of looking at what inflation does to the national debt perhaps…”


    New issues: Skipton

    • Skipton Building Society today priced a £350m, 6y NC5, 6.25% SNP bond at gilts +275bps via Barclays, BNPP, NatWest (B&D) and SocGen.