GBP Swaps: Headline trading; More buy-ins revealed

Headline trading sends yields higher; Water flow?

Despite a holiday in many parts of Europe promoting a summer vibe for the market today, the gilt futures volumes topped 200K (better than they have often been lately) as fixed income markets chose to headline-trade, and found they didn’t like what they were reading.

From 3.875% at 11am London time, the 10y gilt yield pushed smoothly and steadily higher in a straight line, to close the day at 3.955%, up 13bps on the day.

Initially the rot started with BOE Deputy Governor Ramsden’s warning that QT sales of gilts won’t diminish in size any time soon, and will probably increase from their current £770m a pop and £80bn a year.

Nuanced comment from Governor Bailey late in the day, to the effect that £100bn a year would possibly prove too much of a threat to gilt liquidity, but not before US data could follow Ramsden’s comments by coming in less-weak-than-expected.   

The latest weekly US jobless claims data came in at 242K instead of the expected 252K, and the latest Philly Fed Business Outlook Survey for May showed a much less pessimistic sector than had been expected (business outlook -10 versus forecast -20 and previous -30).

This US data underpinned the recent consensus view that GBP rates are going to be driven by headlines, anyone’s headlines really, until CPI/RPI data next Wednesday gives the GBP fixed income market something of its own to cling onto.

For now though, said one disappointed-sounding market participant this evening, “it was perhaps a little busier than people had been geared up for given the (European) holidays. Gilt futures led the way and there was probably more selling than people with one foot in the weekend had been anticipating.”

Traders anticipate that a lack of US data and a glut of four-day weekends in the fixed income hubs of Paris and Berlin will see a very quiet session tomorrow, but illiquidity always has risks of its own. “People are still insecure about whether the US is going to slow down in a straight line or just oscillate for a while,” said the above GBP market participant.

“But in thin volumes this kind of trading is natural, and I still think the big picture will see inflation falling sharply, here and in the US, over Summer, with intraday ups and downs along the way.”

And on one last note, he said that while “it’s interesting to see gilts staying close to Bund moves and the (10y) spread sticking to 150bps, maybe the peak of that spread has been and gone.” But equally he said it was unsettling today to see 10y gilts like the Jly ’31 now at their highest (just sub-4%) since the Truss epoch…”

In other news, the Water Companies, under pressure for treating the UK’s natural resources like their own private toilets for the 35 years since their privatization, panicked a little today at the possibility of a possible future Labour government, and promised to raiser £10bn to start paying for the process of picking their toilet paper out of beautiful natural waterways.  

Traders suggested that while this may be nice for IRS in the years to come, and even perhaps for the linker market, maybe, given the dominance of gilt supply, this likely new GBP bond  issuance stream is but a drop in the ocean.

At the 4:15pm close of play SONIA futures were 13 ticks down in the long-end and little changed at the front. The 10y gilt yield was +13bps at 3.96%, the 2y was +9bps at 3.95% and the 30y was +13bps at 4.39%. In ASWSs the 2y was +3.8bpos at 17.1bps, 10y was -1.7bps at -15.3bps and the 30y was -1.8bps at -61.3bps. In linkerland, breakevens were +2bps in 5y and 10y at 3.44% and 3.60% respectively, while 30y was +4bps at 3.38%.

Final British Steel buy-in revealed

The bigger the market becomes, the larger the gap seems to be between pension buy-ins being executed and being announced. Today saw news from deal advisor LCP that Legal and General has pulled off another pension buy-in for the British Steel Pension Fund.

The £2.7bn buy-in completes the long process of de-risking British Steel’s £7.5bn of pension liabilities. In a statement today L&G said “Through a series of well-timed transactions since the establishment of the umbrella, the Scheme took advantage of volatile markets and acted decisively to capture attractive pricing to achieve the Trustees’ and Sponsor’s objective of full insurance.”