GBP Swaps: Hawks unconvincing as front-end surges

Steep rock climb 25 Mar 2021
Attempts by the ECB to at least sound hawkish didn't convince, and with US banks crashing the subsequent EGB rally dragged gilts in their wake.

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  • ECB and US banks the drivers; Hawkish tone lacks sting

  • RBC: Favouring a May hike over standing still


ECB and US banks the drivers; Hawkish tone lacks sting

Despite the ECB’s attempts to cast today’s 25bps hike as part of a hawkish approach, core EGB markets clearly thought ECB President Lagarde protested too much, with strategists at places like Danske Bank now predicting just one more hike (in Sep).


Bunds continued to rally after Lagarde’s press conference, bringing gilt yields with them. A little after the London close, the 10y gilt yield is now 11bps off its intraday peak at 3.65%, a three week closing low and about 4bps below yesterday’s closing level.


That gilts are being led by Bunds was apparent in the near 10bps drop in 2y yields at the time of writing (in thin post-4:15pm trading of course), driven there by a 15bps fall in Schatz yields.   


Such is the rally in Schatz that Natixis strategists were quick to recommend shorting the 2y sector even before the close of trading today, so given the parallel moves today then gilt traders will no doubt being monitoring the curve for some kind of near-term flattening reversal.


The ECB of course is not the BOE, or the MPC, but it feels like the expectations are for next week’s MPC meeting to follow in the ECB’s footsteps with a 25bps hike, serious hawkish tut-tutting and a general sense of a peak being reached or getting very close.


With so much going on elsewhere at the time, GEMMs and the DMO will not have been too dismayed by the pretty mediocre 1.70 times bid/cover in this afternoon’s £770m APF sale of 2044 to 2072 gilts by the BOE, although it did nothing to prevent today's curve steepening.


The most popular gilt was the shortest on the list, the 3.25% 2044 which attracted £528m of bids and saw £331.5m of those bids accepted, followed by the 0.5% 2061 which saw £254m of £264m of bids accepted. Elsewhere interest was patchy, with about half the long gilts on the list subject to no bids, but with the focus being so intensely on whether the ECB will launch a turning point for EUR fixed income and US bnak turmoil, today will have had an asterix against its name as far as the BOE is concerned.


As for those buyers of the 2044s, they will have been happy to see the yield drop from 4.146% at the time of purchase, to 4.08% at the time of writing, two hours later.


Tomorrow the market’s attention is expected to flit back from mainland Europe to the US, where non-farm payrolls are seen slowing a touch to +180K from +236K last month. (CORRECTS) 


On the curve, 2s/10s gilts bull-steepened 5bps to -1bp, and at the 4:15pm close in London 10s/30s was 1.7bps steeper at +41.6bps. In ASWs the 2y was -2.6bps at 15.6bps, 10y was unchanged at -8.8bps and the 30y was +0.4bps at -55bps.  SONIA futures followed SOFRs and EURIBORs higher but rose by a more modest 8.5-11 ticks in the reds.   


RBC: Favouring a May hike over standing still

Strategists at RBC previewed next week's BOE meeting and expect a 25bps hike to 4.5%. “Overall, we think the MPC will retain a hiking bias but keep their options open by stressing the data dependence of their decisions going forward. One final hawkish tilt we expect from the meeting is no change in the voting pattern with a 7-2 vote in favour of a 25bps rate hike; the two dissenters voting for no change. To make clear, we think that the days of large increases in Bank Rate are behind the MPC and, even allowing for the recent CPI inflation overshoots, we don’t see a vote or votes for a 50bps moves on the MPC at present.”


And looking at the individual components of the MPC it added that “ahead of the March meeting we had thought that Jon Cunliffe might be persuaded by the tensions in the global banking system to vote for no change but that didn’t materialise. Having not done so last month we don’t think there has been enough in the interim in terms of the impact on UK banks that might make him change his position at this meeting. So that would again leave Swati Dhingra and Silvana Tenreyro again voting for no change.”