GBP Swaps: IL45 gets big book but linkers slip

The new IL45 may have secured a record book but linkers’ performance overall on the day was unspectacular at best.

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  • IL45 gets big book but linkers slip

  • Stubborn inflation suggests paying 4y5y real yields: BofA

  • JPM: Sell the 10s/20s/30s gilt fly


    IL45 gets big book but linkers slip

    The new IL45 may have secured a record book with 157 orders totting up to £46bn but linkers’ performance overall on the day was unspectacular at best, with real yields up by 6-8bps in the 20y to 30y area as the curve bear-flattened to head for the close with RY at around the day’s highs, while long cash breakevens tightened by 2-4bps and RPI swaps came in by 3-5bps.


    Still, rather than the supply, inflation traders tended to blame nominals and newsflow for the selloff rather than new deal indigestion. “It was the headlines,” said one dealer, pointing in the direction of First Republic and the US banking sector.


    The DMO sold £4.5bn of its freshest bond at 0.6543% and 3.75bps over the IL44. CEO Robert Stheeman was sounded happy with the result, remarking that he was pleased that the bond had kicked off 2023-24’s syndication programme on a “strong note” with a “highly successful” launch executed in a “very efficient manner” with a “quality” order book served up by the quartet of leads: BofA, BNPP, JPM (DM) and UBS. The IL45 finished on the screens at around 0.70% and about 3.5bps over the IL44.


    Nominal gilts traded lower in line with USTs but underperformed Bunds following pre-ECB gains for the front of the euro curve. The gilt future fell 39 ticks in around 255K and the curve bear-steepened to -1.2bps (+1.9) in 2s/10s and 35.4bps (+0.6) in 10s/30s as SONIAs crept 2-3 ticks higher in the reds.


    Gilt asset swaps cheapened by a decent 2-3bps across most of the curve but stayed in recent ranges with 10s at -12.7bps (-2.2) and 20s at -46.4bps (-3.2).       


    Stubborn inflation suggests paying 4y5y real yields: BofA

    The UK has a problem with inflation persistence, suggests BofA, with market consensus and BOE forecasts missing the sharp rise in CPI and (especially) RPI since the start of the pandemic.


    “The dispersion of core CPI component inflation rates is telling, with only 10% of the core basket recording sub-2% rates and 30% recording rates of over 10%,” the bank estimates, and it suggests the UK will need “meaningfully positive real policy rates” to keep inflation in check (and finance the current account deficit). Hence it recommends selling 4y5y real yields with a target of 80bps and a stop at -40bps:


      “We would be reticent about a simple outright sale of linkers on real yield, with the ever-present possibility that another supersized monthly RPI print delivers punitive adverse carry. Why a 4y5y real rate? Because it lines up with a particularly attractive UKTi pairing to execute a bearish forward real rate trade, we would say. A cash-for-cash shortening trade, selling UKTi 2032s to buy UKTi 2027s ‘pays’ the forward real yield between the bonds of 5bps.”


    BofA says that the main risk to the trade is “a recession coupled with a return to sub-2% underlying inflation that sees the UK return to the zero lower rate bound.”


    JPM: Sell the 10s/20s/30s gilt fly

    The simple 10s/20s/30s gilt fly hit a recent low yesterday and strategists at JP Morgan recommend selling the belly of the 10s/20s/30s gilt fly with 50:50 risk weights. Writing a few days before today’s IL45 syndication, they explain their rationale for the trade:


      “The belly of the 10s/20s/30s gilt fly has outperformed with the fly back at its richest levels for the past six months. This fly has exhibited limited directionality with the level of yields but has been more directional with the 10s/30s gilt curve over the past few months. This fly looks around 1.5bp rich vs. 10s/30s on a short term regression basis.”


      “(Last week) saw the tap of gilt 3Q53 which may explain the relative richness of the fly vs. the 10s/30s curve. A lack of 20Y supply can likely prevent a large cheapening in 20Y but with the next 30Y gilt auction not until on 6 June (there is the expected 2063 syndication planned for w/c 15 May) we see scope for some short-term cheapening in the 10s/20s/30s fly.


      In addition, any end investor demand on a breakeven basis for the new UKTi 2045 could also cheapen the 20Y sector of the conventional gilt curve.”