GBP Swaps: Let them not eat cake; HSBC eyes Carolean era

Gilts track USTs as stagflation fears rise; Quiet Pill

Anyone wanting to revive fear of stagflation (which has gone quiet in recent months) need look no further than US GDP data today, which saw annualized Q1 GDP rise 1.1% versus a forecast 1.9%, while the price index component of the data showed up at +4% versus a forecast +3.7% and a previous +3.9%.

That put the cat amongst the pigeons across Western bond markets and 10y gilts, which had been cruising at 3.7175% when the data came out at 1:30pm were last at 3.79%, up 7bps in the day, exactly the same increase as seen in its big brother, the 10y UST.   

The 10y real yield jumped from 3.2bps to 11bps over the same timeframe but breakevens paint the fuller picture, rallying across the curve from +5bps in 5y to 2bps in 30y as the market decided that slow growth and fast inflation are both bad, but fast inflation is the  most powerful of the two threats.

Across the fixed income spectrum today the 10y yield was last at 3.79%, +7bps as mentioned, 2y was +7bps as was 30y, suggesting the US GDP data left the market feeling flat as a pancake. In ASWs the volatile 2y was last +6.6bps at 26.3bps, 5y was +0.4bps at 29.5bps, 10y was +0.3bps at -12bps as was 30y, at -55.6bps. In SONIA futures the front end was little-changed in a low-volume session, while the long end sold off 11 ticks.

Over in linkerland, RPI swaps broadly matched BE’s with the front end of the curve +6bps and ultralongs +3bps. And yesterday’s £4.5bn IL45 syndication that drew a record-breaking £46bn of bids, in another sign of inflation-anxiety, but was followed by soggy price action. The IL45 is now trading at a spread of just under 3bps versus its issuance benchmark the IL44, having priced at 3.75bps. So it is doing OK, even though both linkers have sold off by around 12bps since yesterday’s sale.   

Finally, the underpaid and overlooked working folk of Great Britain would have been saddened not to hear more from their new champion Huw Pill, the MPC’s member for cultural diversity. Pill supportively told his new admirers that the time has come for them to accept they are poorer than they were, and to get on with it.

Puzzlingly this hasn’t gone down well everywhere. Some newspapers even suggest that people in areas more deprived than Pill’s current hometown of London might wonder whether someone who enjoyed a university grant as he learnt his craft at Oxford, before going onto Stanford, Harvard, the ECB and Goldman Sachs, prior to his nearly £200k per year gig attending one MPC meeting a month for the BOE ,might consider keeping his opinions about things he can’t control to himself?

Scandalous of course. Keep up the good work Huw. You’ll be Governor before you know it (salary £500K a year, plus free tea and coffee).

HSBC: Carolean era to soon usher in lower yields

In a strategy note that pays homage to the dawn of the new Carolean era – the first on in 338 years – strategists at HSBC decree that the new era will soon become a golden time for holders of gilt-edged UK government bonds.

HSBC notes that “Gilts have endured a wild ride since King Charles III’s reign began in September 2022. After surging from 3% to a high of 4.5% amidst the autumn political volatility, 10-year yields then retraced lower before finding resistance around 3%. It has been a bumpy journey so far this year as the market has grappled with news that the economy is faring better than had been anticipated while also facing increased risks from the impact of the banking turmoil.”

But fear not, HSBC says that while “the outlook remains highly uncertain and we expect volatility to persist in the near term,” after that a “a renewed bull trend” will emerge, “causing a more sustained fall in yields through the second half of the year.”

It says that while the near-term risks are skewed towards further monetary tightening, “we should not overlook the fact that we have already seen one of the most aggressive hiking cycles in over 100 years. At 4.25%, monetary policy is already restrictive and further hikes would increase the risk of over-tightening. In our view, the more restrictive monetary policy becomes, the higher the probability of a swift return to lower future interest rates.”

Thus, HSBC says that “we find it surprising to see valuations imply that policy rates are soon likely to become more restrictive in the UK than in the US. Although the UK faces a more challenging inflation outlook, it seems unlikely that if the Fed starts to cut rates sharply this year, as the market is pricing in, that the BoE could keep policy tight.”

And while central banks wait for validation in the data that no more hikes are needed.“the bond market can get there earlier because it discounts all available information today and pre-empts the data. “we think markets will gradually assign a higher probability to the possibility of a hard landing in the coming months. As they do so, it should be supportive for lower gilt yields.”