GBP Swaps: Solid 10y auction helps gilts to nearly keep up

BOE Sunny 9 Jun 2022
A solid 10y auction helped gilts to almost keep up with the rally in Bunds and USTs today, with some looking for further 10y performance.

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  • Still lagging Bunds after US CPI – but only just

  • 2033 gilt outperforms after auction, seen offering value against 30y

  • New issues: Arqiva, COE, RBC


    Still lagging Bunds after US CPI – but only just

    Gilts remained unable to beat the pack today but almost kept up with Bunds after a decent gilt auction (see next section), a UST-led rally, a hawkish 'ECB sources' story and a high degree of confidence - how could 47 out of 48 economists polled by Bloomberg be wrong? - in forecasts of a 25bps BOE rate hike on Thursday.


    Still, ahead of details of the MPC's vote and updated forward guidance from BOE Governor Andrew Bailey, SONIA forwards continue to price another 19bps of tightening at the June meeting and 42bps by September, rather than a pause.   


    Lower-than-consensus US CPI today helped gilts to rally by 3-6bps led by the 10y sector, while the 5y note led Treasuries’ gains. However, that was not quite enough to allow gilts to outperform with 10y spreads edging out slightly to around 151bps (+0.6) against Bunds and 34.9bps (+1.6bps) against USTs at the London close.


    On the curve though, gilts 2s/10s flattened to -1.6bps (-1.9) and 10s/30s steepened to 39.1bps (+1.0) with the syndication of a new 4% 2063 approaching next week.


    Gilt asset swaps mostly cheapened a touch with 5y at 27.1bps (-1.5) and 10y at -43.5bps (-0.3).


    Finally, inflation rose heading into the US CPI but then pared gains on the follow as TIPS breakevens tightened sharply at the front end and nominal gilts rallied further. RPI swaps finished 2-5bps wider led by the front end and real yields fell by 7-9bps.   


    2033 gilt outperforms after auction, seen offering value against 30y

    The DMO sold £3.5bn in 2033 gilts at 3.849% at today’s auction with bid/cover of 2.81, followed by further £875m at the PAOF after gilts rallied through the morning. The 2033 is heading for the close 4.5bps stronger on the day and outperforming by around 0.5bp on the curve versus its neighbours. 


    Writing shortly before today’s auction, RBC was positive about the sale on micro-RV and cross-market grounds, although it was wary of upcoming supply:


      "From the DMO, we will see the rate of supply double relative to the previous 8 weeks. After including APF supply, we will see 10y supply in 7 of the next 8 weeks.


      “On the other hand, the supply of short gilts from the DMO will see a rare 3-week gap post next week’s 4e27s tap – which marks only the second time this has happened since the DMO stepped-up the pace of issuance last October.”


    RBC finds that the last time the market saw a 3-week gap in short gilt supply from the DMO (in the 2nd half of Jan 23), the 5s/10s ASW box flattened quite sharply, albeit helped by redemption inflows. Consequently, RBC likes the 10y sector against 30y rather than 5y:


      “The UK 10s/30s curve still looks c.10bps flat relative to the UST and Bund curves. With the >20y sector to be supplied in each of the next 5 consecutive weeks, this provides fertile ground for this catch-up process to proceed”


    More speculatively, it suggests that investors may start to look for value cross-market given recent spread widening:


      "Gilts have been underperforming USTs and Bunds cross market and sit at optically attractive levels. However, timing here is key and this is something we’re keeping a close eye on. Nevertheless, these levels could start to see some investors looking to oppose this recent underperformance."


    New issues: Arqiva, COE, RBC

    • TV and radio transmitter operator Arqiva plans a £92m secured note to partly refinance a £262m EIB loan. Fitch rated the bonds BBB and noted that although Arqiva has RPI-linked revenues, inflation swaps in place until 2027 mean that the effect of higher inflation on Arqiva in the short to medium term is negative.


    • Council of Europe (COE) tapped its 0.75% 2025 bond for £50m via DB.


    • RBC sold a £1bn FRN due May 2024 paying SONIA +48bps. Self-led.


    • Social housing provider People for Places (A/A3) last week sold a £75m 32y bond 5.75% due May 2055. Lead is NatWest.