GBP Swaps: Deep calm ahead of first 2023/24 syndi

Deep calm ahead of first 2023/24 syndi

The trouble with headline trading, suggested GBP fixed income traders this afternoon, is that when there are no headlines there’s little trading. One such trader, a senior linker trader at a leading GEMM, described today as ‘quiet to the point of boring,’ although at least linkerland has the excitement of 2023/24’s first syndicated DMO sale to look forward to.

Due to the PSNCR data release tomorrow morning, the usual Tuesday syndi spot is expected to nudge over to Wednesday but, the above trader contended, everything else about the 0.625% IL45 debut on the big stage is looking satisfactorily straightforward.

“It’s quite small (likely £3.5-4bn) and, while it will slightly depend on the allocations, it is expected to go very well. It’s on a cheap part of the curve is a relatively low risk area (in terms of duration) and I think it will be well oversubscribed,” said the trader.

Looking at the market today the same inflationist said that “it’s very, very quiet, there really is nothing much to say, I think that’s true across (a range of linker and fixed income), markets as well.”     

“Globally there is a fair bit of uncertainty re the macro picture and the markets haven’t fully got going after the Easter pause so… it’s just a quiet time.”

Volumes late in the London session backed up this analysis, with the once mighty gilt future barely limping past the 125K mark while for once thin volumes are not generating whippy price action, with the 10y gilt yield trading in a 4bps range (3.74-3.78%) since 8:30am BST.

Similarly (for example) the IL42 RY has traded in a 51-57bps range today and a lack of hard-hitting US data has allowed the apathetic to approach the afternoon session with confidence in their approach.

The sense of calm was cemented by the strong bid/cover ratio at this afternoon’s £770m gilt sale operation. The BOE had nine gilts dated 2026-2029 on the table and the most-bid gilts were the 0.375% 2026 and 1.25% 2027 curve neighbours with £665.6m and £646.4m of bids respectively. But the 2026 was way ahead in accepted bids, with £375.2m versus £90.8m.  

A confident start to the week for an increasingly functional-looking gilt market (low volumes notwithstanding). In other news the The Pensions Regulator published its recommendations regarding LDI funds (for more detail see TPR confirms 250bps for UK LDI plus fund-specific buffer). 

The main headline from the recommendations was that pension funds should be set-up to be able to cope easily with a 250bps swing in yields over five days. This is in compliance with recommendations made by the BOE’s Financial Policy Committee on Mar 29 (see Long gilts bull-flatten as FPC recommends a 250bps buffer), which was a figure at the liberal end of market expectations, prompting a relief rally in long gilts/linkers.

Thus, the taking-on-board of this advice by The Pensions Regulator today did not trigger much in the way of market response.  Late in the session the 10s/30s gilt curve was unchanged at 34bps while 2y gilt yields underperformed on APF day with a +6bps rise, flattening 2s/10s by 4bps as 10y gilt yields sat little-changed at 3.77%.

Swap spreads were lightly more positive with the exception of the 2y which was +5.1bps at 21.4bps, while 5y was -0.2bps at 29.1bps, 10y was +1.5bps at -12.5bps and the 30y ASW was +1.2bps at -55.0bps.

Across the great divide and into linkerland and real yields were +1 to +2bps across the length of the curve while B/Es were +2bps at the long end and +0 to +1bps elsewhere. RPI swaps were mildly more positive today with the exception of the ever-feisty 1y swap, which is currently +8bps at 4.30% and 2y is +5bps following a $2 bounce in oil prices from session lows and nominal bear-flattening at the front end.

Barclays ups its BOE peak forecast

Late on Friday night, even as some market participants were aggressively trying to forget the week just finished, strategists at Barclays were filing their latest update on their expectations for where the peak of the MPC’s hiking activity may land.

Barclays said that “Strong labour market and inflation data, along with the rebound in the April services PMI, have all but sealed our call for another 25bp hike in May, and have led us to add one additional 25bp hike at the June meeting, which would take the terminal rate for the cycle to 4.75%.”

It added that recent data releases have thrown the MPC’s inflation-taming challenge into ‘sharp relief,’ and said that while the base effects that should subdue annual inflation remain imminent, underlying inflation risks have raised the chances of a 4.75% cyclical peak.

New issues

• Travelodge (B3/B-) late on Friday priced 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). The GBP tranche priced at 10.625%.