GBP Swaps: Market rattled to its core; It’s Truss-time again

PM Truss Umm 17 Oct 2022
At the 4:15pm close today the 10y gilt yield was 13.5bps higher on the day as Bunds plunged and SONIAs gave up the ghost.

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  • Rattled to its core, market capitulating

  • Deutsche: It’s Truss-time again

  • New issues: Northern Gas, BMO, Equitable Financial


Rattled to its core, market capitulating

At the 4:15pm close today the 10y gilt yield was 13.5bps higher on the day, having risen 12bps more than Bunds and 9bps more than USTs. The streams of gilt underperformances are becoming waterfalls as longs (outright and in cross-market trades) get stopped out and the closely-watched 10y gilt-Bund spread closed at around 186.5bps, an unusually wide spread.


In the increasingly wild front end, SONIAs crashed by another 25-30 ticks in the reds to imply a peak for BOE Bank Rate of 5.64% around the end of the year. 


Outright gilt yields are trading at their highest levels since the rupture, the Truss mini-epoch that saw 10y gilt yields just 14bps higher (at 4.5%) than they currently are.


Yesterday’s CPI data put the cat firmly among the pigeons as core UK inflation started to rise quite substantially, in defiance of flat expectations. This, according to one swapper today, triggered stops in an already-stressed market that are now cascading their way through gilts, seemingly gathering momentum by the hour.       


After starting this week at 3.95%, while an army of bulls fortified its defences atop the 4% high watermark, the 10y gilt yield has just blasted through that notional resistance, and is +40bps on the week. With Friday still to come.


The above swapper told Total Derivatives today that the outlook isn’t bright, for the gilt market or the UK economy. Although against USTs he said that “UK inflation is obviously proving sticky, but with the front-end of the UST curve pricing in cuts before the end of 2023, there could be quite a lot more selling there than here (the 2y UST yield was up a mere 7bps at the London close, versus 17bps by 2y gilt yields)."


But as for the keenly-watched gilt-Bund spread, he was dismissive of historical precedent, as well as the outlook for gilts. He said that “UK inflation should hit the currency and the risk of higher rates to support it will at some point see the UK economy crack under their weight, and under the weight of outright inflation levels.”


Not a happy prediction for gilt bulls. But perhaps there aren’t any? Anyway, with the market now fully invested in the prospect of persistent inflation and second round effects, a sharp CPI drop and accompanying massive gilt rally must only be a matter of weeks away.  


Shortly after today’s closing siren, the 2s/10s gilts curve was 2bps flatter at -16bps and 10s/30s was 5bps lower at 28bps. ASWs were richer again and +2.7bps in 5y to 20.8bps, +1.2bps to -13.6bps in 10y and +0.9bps to -58.3bps in 30y.


Deutsche: It’s Truss-time again

Instant nostalgia is considered unhealthy by many but this seemingly is where the gilt market is going given the latest spike in yields and memories of the faraway Truss micro-era, noted strategists at Deutsche this morning.


It said that “a higher terminal rate could be required, even at the risk of stifling economic growth. The path of the government to lower taxes this autumn is narrowing and may be compromised by the surge in Gilt yield to levels when PM Truss was in charge last autumn. The blowout in yields and 10y UK/US IRS and UK/EU spreads is a signal that the risk premium is being repriced into sterling assets and pours cold water on the bullish narrative in sterling.”


New issues: Northern Gas, BMO, Equitable Financial

  • Northern Gas Network is close to pricing a £450m, 10y, fixed-rate bond at gilts +183bps via Barclays, Lloyds (B&D) and RBC.


  • Bank of Montreal is close to pricing a £750m 4.25y, Sep 2027, GBP Covered FRN at SONIA +65bps via BMO (B&D), Barclays, HSBC, NatWest and Santander. 


  • US insurer Equitable Financial Life is close to pricing a £300m, 5y FA bond at gilts +210bps via Barclays, Deutsche (B&D) and HSBC.