GBP Swaps: Carry on outperforming after mixed data

Steep mountain goats 21 Jun 2021
GBP continued to outperform after extended underperformance of late and mixed data this morning.

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  • Carry on outperforming after mixed data

  • Barclays: If hawkish front end pricing is right, look for 5s/30s steepeners

  • New issues: Travelodge


    Carry on outperforming after mixed data

    Yesterday’s weak US house price data and Philly Fed headlines bull-steepened the GBP fixed income curve in the wake of Wednesday’s sharp CPI-driven bear-flattening, and today, inconclusive UK data led to a watery continuation of that move as gilts modestly outperformed all-comers ahead of the next challenge, US PMI data at 2:45pm BST.     


    The UK’s own homegrown PMI data this morning was inconclusive, leading to headlines such as ‘Strong services PMI data to add to hawkish pressure on BOE,’ while weak Manufacturing PMIs were to have the opposite effect.   


    In short UK PMI data was mixed while GfK consumer confidence was mildly less abject at -30 for the April headline figure than the expected -35. Despite this, the gilt market had a think about the numbers and then rallied a bit before meandering in thin Friday volumes thus far.


    Traders have noted this week that gilts look the more oversold of the fixed income markets lately (albeit given that the UK has some unique inflation problems) and the fact that 10y gilt yields have gone from being 10bps below the UST equivalent at 3.28% on Mar 24 to 20bps above at 3.73% four weeks later supports this.


    So with CPI out of the way, gilts seem set to outperform in mild trading conditions and currently the 10y yield is -3bps, while the 30y is also -3bps at 3.08% and the 2y is -1bp at 3.71%. In swap spreads by lunchtime in London the 5y is -1.2bps at 15.8bps, 10y is +0.6bps at -14.2bps and the 30y is +1.2bps at -57.2bps.


    In inflation, real yields were 1-4bps lower led by the front end and cash breakevens were little-changed.


    Talking of Inflation, and next week is set to be an exciting one in linkerland, where the seven-stage 2023-24 syndication season will kick off with the launch of the new 0.625%, IL45 via BofA, BNPP, JPM and UBS, presumably on Tuesday. Strategists expect the DMO to raise £3.5-4bn (with some downside risk due to LDI demand concerns) from the sale in what is seen by some banks as still a cheap part of the curve. The IL44 is currently trading at a real yield of 62bps versus the 30y peak area of the curve which is around 65bps. The consensus pricing is be IL44 +4/5bps.


    Barclays: If hawkish front end pricing is right, look for 5s30s steepeners

    Looking at recent inflation data overshoots and the pricing in of more hikes in the front-end of the curve, strategists at Barclays noted that although the expectation remains that inflation drivers led by the invasion of Ukraine, the data is worrying. “The bottom line,” Barclays says, “is that the MPC had expected headline inflation to be 9.2% y/y by March versus an outturn of 10.1%, and this overshoot cannot be easily ignored.”


    But, it continues “if the tightening priced (at the short end of the curve) in is delivered, the front-loading of tightening would likely coincide with falling inflation. That would imply that (MPC monetary policy actions) might not be about delivering more tightening above and beyond what is currently priced but rather not easing as quickly as the market might expect as the committee keeps rates at restrictive levels for longer than would otherwise be expected.”


    Consequently, Barclays adds, “this leaves the 5yr point on the curve, which is most sensitive to rate expectations, as fairly valued, if not a little cheap. If the MPC does not deliver the amount of tightening priced or explicitly pushes back against the rebuilding of expectations, then we should see the curve come under steepening pressure led by the 2-5yr sector. GBP5/30s looks relatively flat when regressed against the money market slope.”


    “Versus GBP5y5y/15y15yf,” concludes Barclays, “GBP 5/10/30s, looks very rich and has decoupled from the shape of the long end of the curve. If the MPC do not validate expectations for the path of policy rates, the curve should come under steepening pressure, restoring term premium and paring back rate expectations. Into the May MPC decision, we would expect interest to grow in opposing the build-up of expectation via the GBP 5/30s steepener.”


    New issues: Travelodge

    • Travelodge (B3/B-) is close to pricing a two-tranche, £550m-equivalent secured bond consisting of a £330m 5y NC2 and a €250m 5y NC1 FRN via Barclays, Citi and Goldman (B&D). Price talk on the GBP tranche is around 10.75%.