GBP Swaps: SONIAs gain as Ill wind blows MPC’s words away

Hurricane satellite
A blast of risk-off trading blew away any nuance from the MPC chat to drive an improbable gilt outperformance. NatWest calls the end on hikes.

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  • Ill wind blows MPC’s words away, SONIAs gain

  • NatWest: Hikes over but stay short 10y gilts

  • New issues: People for Places


Ill wind blows MPC’s words away, SONIAs gain

Like a sudden tornado emerging from rural Kansas, a re-flaring of regional US bank concerns blew the MPC off its broomstick this afternoon, allowing the hawkish whiff attached to its 25bps rate hike to be puffed away in an afternoon squall of risk-off trading.


After the black-clad BOE Governor’s stern words sent 10y gilt yields spiraling up to 3.80%, before a sudden dip in the Dow sent them plummeting back down to 3.66% before finally ending this swirling session at 3.705%, -8.5bps on the day, helped by lower-than-expected US PPI prints. SONIA futures jumped by as much as 15bps in the back reds and the greens. 


What could have been an afternoon of tedious naval-gazing regarding Andrew Bailey’s body language when he used the words ‘stay the course’ and whether or nor his tummy rumbled in distress when discussing soaring food costs, became a straightforward risk-off rally in core global bond markets.


It saw 2y gilt yields close about 15bps below Tuesday’s weekly high of 3.87% and provided welcome relief for anyone trying to avoid focusing on an even higher UK rates peak or what the cost of next month’s mortgage payments will now be.


In fact, everything about today was less stressful, according to one active market participant, than might appear given the extent gilt yields were blown around. The source said this afternoon that “it just wasn’t hectic at all…” during the brief sell-off post-MPC and then the subsequent rally.  


He added that one aspect that did catch the eye was the outperformance of 10y gilts versus Bunds (by about 2bps) and USTs (by about 4bps) while the eye of the risk-off storm was upon markets.


“It looked strange that gilts outperformed so much but then again they’ve been cheap. Earlier today (10y) gilts were 154bps over Bunds (a little after the close the spread is 147.7bps), which is 70bps wider than three or so months ago. People have tried being long gilts versus USD in things like 1y4y and it hasn’t worked because too many were the same way round.”


“Today though, it is working, gilts just got too cheap (on an RV basis).”


Tomorrow no doubt, with the risk-off move fading fast, there will be more scrutiny regarding the BOE’s words, and whether or not the Governor’s talk of battering CPI down to 2% are the empty words of a man of straw or the leadership of a man who can control market expectations like a veritable monetary policy wizard.


At the 4:15pm close the 2s/10s gilt curve was unchanged at -2bps, 10s/30s was +4bps at 43bps, while in ASWs the 5y was +0.3bps at 27.2bps, 10y was +0.6bps at -10.5bps and the 30y was -0.4bps at -55.1bps. In linkerland things were much calmer with real yields 4-8bps lower led by the front end, and cash breakevens 1-2bps tighter. 


NatWest: Hikes over but stay short 10y gilts

Strategists at NatWest said this afternoon that despite the MPC being ‘mildly hawkish’ in its comments surrounding the widely-expected 7-2 vote in favour of a 25bps hike in Bank Rate to 4.5%, it sticks to its view that the MPC is now hiked-out.


Looking at this and at what the move means in terms of market recommendations, NatWest said that “Global events have probably driven markets today more than the BoE has.”


“The absence of any dovish dilution to the BoE’s policy guidance leaves the door open to further tightening, but we continue to think that headline inflation will come off rapidly in the months ahead, while lagged headwinds to the consumer from higher rates will dampen demand, meaning 4.5% will likely be the peak in Bank Rate.”


Given this view, it said that “we think the cross-market under-performance of UK rates, particularly at the front-end, feels overdone and not justified by fundamentals, even without a marked dovish shift from the BoE today. We like being long 1y1y GBP vs USD.”


“For longer-dated rates, a combination of still-high inflation (limiting demand for duration in general) and a (relative) lack of concern for financial sector stability (limiting flight-to-quality demand) stacked against a heavy supply outlook has weighed on gilts and driven cross-market underperformance. We expect this to continue, despite expecting front-ends to ultimately re-price lower. Stay short gilts outright (target 4.3% in 10y) and in 2s/10s steepening.”


New issues: People for Places

  • People for Places priced a £50m 10y EMTN 5.624% due May 2033 at gilts +183bps via Lloyds.