GBP Swaps: Tracking USTs; IL45 too small to fail? ASW view

Pill 11 Oct 2021
Better volumes than Monday did not amount to an exciting day as gilts followed Treasuries and a US-led risk-off mood. Is IL45 too small to fail?

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  • Tracking USTs; IL45 too small to fail?

  • BNPP: Gilt remit tweak and long-end ASW tightening trade


Tracking USTs; IL45 too small to fail?

A busier day than yesterday with close to 200K of gilt futures trading (versus more like 130K on Monday) was nonetheless a fairly straightforward affair as fixed income markets, clung to a US-led risk-off wobble to rally with growing conviction as the day wore on.


An early change (no doubt the first of many) to the DMO’s planned 2023-24 gilt issuance remit did gilts no harm but the DMO’s trimming of £3.3bn from next year’s lumpy supply calendar did little good either, it is only a 1.37% drop in total planned issuance after all.


Similarly, BOE bigwigs Broadbent and Pill both did interviews that sent mixed messages re the inflation threat that at the margin erred on the dovish side but which again had little market impact. Instead today was a macro day, with last night’s troubling First Republic quarterly results, followed by a dip in European bank shares driving UST rates lower, with gilts obediently following every step of the way.


And with no domestic news to categorically run counter to the risk-off tone that’s how gilts traded all day, doggedly tracking a 9bps dip lower in 10y UST yields and slightly underperforming Bunds which seemed to be feeling their geographical proximity to Switzerland.


On the curve, 2s/10s gilts bull-flattened 2bps to -3.5bps, and 10s/30s was +0.8bps at 34.8bps. In ASWs the 2y was +5.2bps at 27.1bps, 10y was +1.9bps at -43.2bps and 30y was +1.2bps at -53.4bps.  


Over in linkerland RPI swaps were higher at the very front-end and +6bps at 4.35% in 1y but lower everywhere else, with 10y and 30y -5bps each at 3.83% and 3.34%, respectively.


As for linkers themselves, tomorrow is the big day, with the first 2023/24 syndication coming in the form of a sale of the new 0.625% IL45. Consensus is that demand in this part of the curve (not as long as the once-fashionable-among-LDI ultras that used to dominate linker syndis) is under-priced and in-demand.


The RY curve seemed to reflect a bit of last-minute concession building with a 4bps rise in IL44 RY from the lows to 61bps in the final 30 minutes of trading, a bigger late sell-off than seen in neighbouring linkers, while breakevens chepaened by 6-7bps . The view among the linkeristas earlier this week is that at around £3.5-4bn, the auction is too small to fail. As well as too cheap.    


Finally, we end with a message of hope from no less a figure than the BOE Deputy Governor Huw Pill. People in Britain, he said today ‘need to accept’ that they are poorer. Uplifting Huw. Thank you so much.


BNPP: Enter long ASW tightener after pension, remit news

Strategists at BNPP had a quick look at the news this morning from the DMO of a £3.3bn reduction in the Net Financing Requirement for this year, the full amount of which goes into reducing gilt sales for this fiscal year (now a mere £237.8bn).


BNPP notes that “long conventional gilt sales are reduced by £1.2bn, while shorts are reduced by £2.1bn. However, for us, the latter merely reflects the greater-than-forecast NS&I take-up that was also announced."


This small change in the DMO gilt remit, said BNPP, "does not impact our structural views: our recently updated end-Q4 2023 10y gilt yield forecast is 3.35%. However, our analysis of net supply net of QE/QT continues to suggest near-term caution, waiting for a further back-up to enter all our more bullishly minded trade ideas.”


Despite this BNPP said it has just entered a long 3.5% 2068 asset swap trade, “following both this remit announcement and this week’s pension guidance.”


With those in mind, BNPP said “it is the conveyor belt of likely de-risking that is key (for gilts), especially given the run-rate of buy-in/buy outs in recent years and the sizeable market projections for this year that are likely to be actioned now the guidance is set.”


Traditionally, said BNPP “the de-risking process tends to eschew gilts in favour of duration matching using swaps; the cheapening of long-end z-spreads can be seen as the market pricing in such significant shifts. However, as we have a left-tail risk (bullish) bias, we see a sizeable rally in long yields triggering a wave of de-risking ahead of many schemes falling back into deficit.”


“Likely extended lead times for LDI in such a scenario point to an immediate gilt demand in our view. Given this out-of-consensus view and the relative cheapness of cash gilts versus GBP SONIA swaps in the long-end, we enter into a tactical matched maturity gilt swap spread tightener. Trade idea: Long UKT 3.5 Jul-68s versus matched maturity GBP SONIA swap: Entry -57.5bp. Target ˗40bp. Stop-loss: -68.5bp.”