GBP Swaps: Busy Monday? RBC on gilt/Bund spread; 2063 talk

Spread 9 Dec 2021
It was an impressive start to this new week across fixed income markets in one key way. RBC says sell Bunds vs gilts. NatWest eyes syndi FV.

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  • Busy Monday? No, GBP remains in the shadows

  • RBC: Time for 10y gilt/Bund tightening trade

  • NatWest eyes £5bn 2063 syndi at FV 2065 +5bps

  • New issues: Swedbank, BNPP, Co-op, VW


Busy Monday? No, GBP remains in the shadows

It was an extremely impressive start to this new week across core fixed income markets in one key way. Having arrived in the UK this weekend, Spring finally came to the new issuance market today, with USD and EUR bond issuance bursting into life, while GBP supply did rather well too.


The sterling sector saw pricings from Swedbank, BPCE and VW (for a combined £1.1bn though, so not massive) in the 5y and 6y sectors, which contributed, one source said today, to “a rangy day” in the two swap spreads which both traded fairly sharply higher, lower and higher again to notch up 3bps ranges each over the course of the day.


But as the above market participant conceded this evening, “I may have missed something, I wasn’t on the desk all day today, but it feels like it’s been slightly more of the same as we’ve the last two weeks. Gilt futures volumes were just lamentable, and we seem to just be following other markets while underperforming again.”


And it’s true that gilt futures volumes of about 140K at the 4:15pm close here in London are deeply unimpressive, and it is true too that gilts again fractionally underperformed (by about 0.5bp versus Bunds), but there were mitigating factors.


The £770m APF sale of 2030 to 2042 gilts received a “rock solid” 2.16 times bid/cover ratio, with £1bn of the total £1.666bn bids split between the 0.375% 2030 and the 4.25% 2032 gilts with both softening up a touch between the sale and the close, in line with the broader gilt market which eased up in terms of price going into the close with the gilt down 50 ticks. The 4.25% 2032 closed at 104.05 having sold at the APF event at 104.15. And asked about tomorrow’s supply event, the 2063 debut, the same source pondered for a while before saying, “yeah, it’ll probably be fine.”  


Shortly after the 4:15pm close today 2s/10s gilts was 1.2bps steeper at -0.1bp, while 10s/30s was 0.5bps flatter at 43.4bps. In swap spreads the 5y was -0.8bps at 25.3bps, 10y was -1.1bps at -13.5bps and 30y was -0.9bps at 58.4bps. Real yields were up either 5bps or 6bps across the curve and breakevens were 1-3bps lower with the long end weakest.


RBC: Time for 10y gilt/Bund tightening trade

The great topic of our time it seems is not actually the threats or otherwise posed by Artificial Intelligence, nor is it how our planet can combat global warming, or even whether Brexit is working out as well as advertised? No, the big question of our time is when should 10y gilt/Bund spread-widening end?


Traders (see GBP Swaps: More underperformance in sleepy restart) and strategists (see GBP Swaps: Familiar end to week; More gilt-Bund) have been gripped by the exponential widening move that has seen the gilt/Bund spread take off from the 86bps area in February to 154bps last week.


Currently it is 151bps, and strategists at RBC noted today that it is not only their peers and traders who wasn’t to know what this spread will do next. RBC said "we have fielded a lot of questions from clients on what has been causing the underperformance of Gilts cross market," saying that it believes last week's MPC meeting was a turning point that convinced it to "add a 10y Gilt-Bund tightener to our trade portfolio."


 RBC reckons the primary driver of this underperformance has been “the economic data beating expectations by more than its global counterparts.” As a result, it says gilts are cheap on a number of metrics.


The spread tends to widen in a bond bearish environment. Yet even accounting for that, the spread appears too wide. If the MPC has lain the foundations for tightening, RBC says the actual triggers may just be yet to come.


It says that jobs data (May 23) and May PMIs the next day will be the catalysts. "Another potential reason for why gilts have underperformed cross market, we think, is that spot inflation has remained much stickier in the UK relative to global counterparts. However… we think the dynamics will begin to swing in the UK’s favour from the April inflation print onwards. This is when the latest, quite reduced, price cap will come through...This should lead to a convergence in headline inflation to the euro area again and this convergence should also begin to weaken this particular impetus of gilt underperformance.”


At the same time it says the manic levels of gilt issuance will reduce in the second half of Q2 "Following the UKT 2063s syndication, the supply of gilts from the DMO will see a sharp step down in the second half of the quarter – by our calculations gilt supply in risk terms will be around 40% lower. We thus also think that the supply pressure as an argument to cheapen Gilts in relative terms will be reduced.”


With these factors and forecasts in mind, RBC recommends: straight 10y Gilt-Bund spread tighteners executed in either cash or through futures (target 130bps; stop-loss 180bps); a beta-weighted spread trade to take out the small outright component inherent in the spread; or receive SONIA swaps versus Bunds cash or in futures.


NatWest eyes £5bn 2063 syndi at FV 2065 +5bps

Looking to tomorrow’s big event, and the smaller events around it, NatWest strategists today said that “this week sees the heaviest supply week of the fiscal year so far with an auction of the 4E27s on Wednesday and, more importantly, the first nominal syndication of the year of the 4% Oct-63s, expected on Tuesday.”


“With (at least) £18bn of conventional supply to be done via four syndications, we expect this week’s issuance could be in the region of £5bn, especially after strong demand for the linker last month. We pencil in FV of the new bond at 65s+5bp, which we think would be enough of a new issue premium to help this be well absorbed initially.” 


The 2065 sold off a touch more than the rest of the curve today to finish further above 4%, at 4.070% (+3.9bps).   


New issues: Swedbank, BNPP, Co-op, VW

  • Swedbank has priced a £400m, 6y NC5 Green SNP at gilts +230bps via HSBC, NatWest and Nomura (B&D).


  • BPCE today priced a £400m, 6y NC5 SNP at gilts +240bps via Lloyds (B&D), Natixis, NatWest and RBC.


  • The Co-operative Bank plans a £200m, 5y NC4 MREL Green bond via Deutsche, Goldman and NatWest following investor calls commencing today.


  • VW Financial Services has priced a £300m, 6y bond at gilts +205bps via Lloyds and NatWest (B&D).