GBP Swaps: Selling; MPC pivot eyed, maybe? Syndi doubters

Deflated balloons 21 Jun 2021
The trend of gilt underperformance gets worse. But why? And will there be a summer linker syndication?

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  • Selling continues; MPC pivot eyed, maybe?

  • Linker syndi doubters as IL51 auctioned

  • New issues: Intesa Sanpaolo, Northern Gas, Nordea


    Selling continues; MPC pivot eyed, maybe?

    At the time of writing the trend of gilt underperformance is surpassing even its usual recent starkness, with 10y gilt yields closing +10ps versus +1bp for Bunds and +3bps for 10y USTs.


    Looking at the latest shunt higher in yield, wider in gilt/Bund spreads, and basically further out into unknown territory by the besieged GBP fixed income market, banks and dealers expressed a range of views.


    When RBC recommended selling Bunds versus 10y gilts two weeks ago at 155bps at the top of the gilt-Bund spread (see GBP Swaps: Busy Monday? RBC on gilt/Bund spread; 2063 talk) with a 180bps stop and a 130bps target, a lot of strategists and traders agreed that the time was roughly right for such a trade after widening from 86bps in Feb.


    Currently it is testing 170bps, well within RBC’s margin of error, and one senior trader at a leading GEMM said this afternoon the hardest question to answer is ‘why?’


    “There’s no reason for today’s underperformance,” said the gilt/GBP IRS desk head. “There’s nothing special happening, PMIs were weaker than forecast so the market’s not headline trading.”


    The senior trader, long-resigned to this relentless lagging of peers by gilts said that it’s possible sellers are consciously just clearing their decks of ready for clear messaging from the MPC that its hiking peregrinations are over. That something could come as soon as tomorrow when headline annual CPI for Apr is expected to come in almost 200bps lower than in March, at 8.2% (10.1% in Mar).


    Alternatively though more clear guidance may have to wait until the June 22 MPC rate decision, or until much later if the Ukraine-Russia war escalates in some way as yet unclear, it could be that shorts are poised to switch on gilts at the drop of a hat. And how much weight should the MPC and investors put on core inflation, which is seen unchanged at 6.2%. 


    But today, said the above swapper, “planning ahead of an MPC move might be a part of it but it is still weird. It’s not even that thin… there are real trades going on and it’s not just all selling. But then gilts have weakened pretty evenly across the curve again…”


    By way of illustration, at the 4:15pm close today, 2s/10s was just a bp steeper at 3.4bps and 10s/30s a bp flatter at 37.4bps. At the front end, SONIAs sold off by about 8-10 ticks from Sep23 outwards. Linker real yields were only +4 to +8bps, again suggesting that supply concerns are not the main driver of the two gilt markets at the moment, resulting in a 2-6bps breakevens rally led by the ultra-long end.  


    Linker syndi doubters as IL51 auctioned

    Gilt supply today consisted of just the £750m, IL51 tap that saw it price at an RY of 1.105% and with a strong bid-cover of 2.82 times at an auction that one linker trader at a leading linker GEMM was “fine…. It just went fine.”


    Looking further ahead, the DMO this morning published minutes of its meeting with GEMMs and investors last night to discuss Jul-Sep supply. The DMO said “The DMO is planning to schedule 13 auctions of conventional gilts and three auctions of index-linked gilts in the second quarter of 2023-24. The DMO also expects to hold syndicated offerings in July and September 2023, one for the sale of an index-linked gilt and one for the sale of a long conventional gilt respectively.”


    It went on to say in regard to the linker syndi that among the GEMMs, “a re-opening of IL 2045 (was) the most often mentioned, along with some calls for the launch of a new 30-year index-linked gilt, or a re-opening of IL 2051. There were only isolated calls for other maturities.”


    Unusually, the DMO also reported that, “some gilt investors, however, recommend that the index-linked syndication "might benefit from being postponed until September or later in the financial year." Still, other investors supported a re-opening of the IL 2045 in July. 


    As NatWest said yesterday (see GBP Swaps: Gilts lag as curves bear-flatten; DMO meetings | Article | Total Derivatives) “opting to front-load its major supply events against a backdrop of very little demand from the natural buyers of long-end linkers (would feel) like a slightly odd decision” by the DMO. Time, of course, will tell.


    New issues: Intesa Sanpaolo, Northern Gas, Nordea

    • Intesa Sanpaolo is on the cusp of pricing a £750m, 10y Social Bond at gilts +265bps via BofA, Goldman (B&D), IMI, MS and Nomura.  


    • Northern Gas Networks plans a 10y GBP unsecured bond following investor talks arranged by Barclays, Lloyds and RBC.  


    • Nordea has priced a £300m 3y NC2 Green SNP at 6% and gilts +190bps.Leads are DB, HSBC (B&D) and Nomura