GBP Swaps: Keep on tracking; HSBC eyes curve and 5y5y
Gilts just keep on tracking
Month-end didn’t bring the hefty LDI-type buying that used to be seen in the days of yore (pre-Truss), although a late bid going onto 4pm did see 30y yields dip 3.4bps to 4.09% before they eased a touch higher into the close.
But in this new age of pension fund ambiguity there was no violent dash for cash, although GBP fixed income was a little bit busier than a typical Friday of late, with more than 200K of gilt futures going through on what was in many ways a mirror image of yesterday’s session.
On Thursday US price data triggered a UST-led fixed income sell-off that gilts slavishly followed. Today weak German data dragged yields down again, with Bunds leading the way while guilts slavishly tracked USTs again (10y gilt yields are -7bps versus -8bps in USTs and -14bps in Bunds) like a cool teenagers’ annoyingly clingy younger sibling.
News that the UK is on track to turn the alchemy of manufacturing money out of thin air (QE) into a £100bn hard loss for the country (QT), a sum that could have funded the entire NHS for almost a year, is interesting, but had no market impact today.
Instead, as traders have suggested at various points this week, the gap between Easter and this first bank holiday has been more about staying calm, with the odd pocket of violent moves, and waiting for the dust to settle on the MPC policy outlook, than anything more ambitious. If so then it could be a very long summer in the GBP fixed income market, though it would be nice for winter to end first.
At the 4:15pm close this afternoon the 10y yield -7bps at %, neatly reversing yesterday’s rise, 2y was -3bps at 3.778% and the 30y was -7bps at 4.08%. In ASWs the volatile 2y was -2.3bps at +23.5bps, 5y was +0.1bps at +29.5bps, 10y was +2.5bps at -9.5bps and 30y was +1.1bps at -55.5bps. In SONIA futures the front end was little-changed in a low-volume session while the longer end was +3 ticks.
Over in linkerland, the RY curve flattened with 5y real yields +3bps and 30y -7bps, enabling the B/E curve to steepen as the front-end fell 9bps and 30y rose by 1bp. Next week, Tuesday sees house price and shop price data kick off a week of largely second tier data, which will leave a lot of minds’ concentrated on what outcome, and particularly what messaging, to expect from the following week’s MPC.
HSBC: Cautious optimism expressed via 5y5y and curve trades
Forcing themselves to look beyond the intoxicating prospect of two consecutive Bank Holiday weekends, strategists at HSBC are pondering the medium term outlook for gilts and the MPC, concluding that short-term pain should produce longer term gains for bulls.
HSBC said in research published today that “ahead of the May (the 11th) BoE meeting, a series of upside inflation surprises have caused gilts to re-price to reflect the likelihood that monetary tightening may not quite be finished. The front-end remains exposed to hawkish surprises, making it too early to buy outright. Instead, we continue to prefer expressing our view that downside risks are under-priced via 5-30Y curve steepeners and by buying 5Y5Y gilt forwards.”
HSBC reasoned that “if inflation and wage growth remains slow to fall back, the risk is that the BoE continues to hike by 25bp increments rather than opting to pause and take stock… This leaves the front-end exposed to further hawkish surprises in the near term, thereby possibly making it still too early to buy the front-end outright.”
“For now,” concludes HSBC, “we therefore prefer to express our long-term bullish bias via a combination of 5-30Y gilt steepeners and by buying 5Y5Y gilt forwards. While these trades may not be immune to more hawkish surprises, we suspect that such a scenario would be met by a further inversion of the front-end and we could see the 2-10Y segment trading flatter towards (or beyond) the levels that we saw when peak rate pricing spiked in the autumn. A scenario of ‘higher for longer’ rates is well-priced and we struggle to see it playing out.”
“More hikes in the near term would only further increase the probability of deeper cuts in the future.”