GBP Swaps: Long end bull-flattening; Summer ASWs view

Round-trip amid lack of drive

A day of quite wide-ranging moves saw 10y gilts rally 4bps in the morning to a low of 4.16%, then sell-off 8bps before closing little-changed at 4.21%. In so doing 10y gilts were very much tracking Bunds and USTs which were led this morning by a rally in Bunds, aided by weak factory orders data and an ECB survey showing a sharp fall in inflation expectations. But the long end of the sterling curve had its own direction, flattening into and out of the 2053 gilt auction.  

The 10y rally ran out of steam by late morning London-time. With USTs still seemingly inclined to weakness now that the curtains have closed for two whole years on the debt ceiling drama, and with no significant data in the US or UK to further drive markets, yields in USTs and then the other core markets started to drift higher in the afternoon, before rallying back going into the UK close.  

Supply-wise, today saw a £2.5bn tap of the 3.75% 2053, which received a strong bid-cover of 2.58 times, marginally up from the 2.5 times at its previous sale. After the morning sale it then sold off in line with the rest of the market, reaching a 4.51% peak, before recovering to close at 4.475%. 

The ultralong end of the curve outperformed with 30y yields closing a couple of bps lower on the day and rallying a little further after the close. Generally though, amid a lack of domestically-generated direction in the form of data or MPC comment, the gilt market was very much buffeted by other markets rather than acting as the buffeter. 10s/30s gilts flattened by 3.7bps to 26.6bps and 30s/50s steepened a touch to -38.1bps (+0.7) . 

If there was any indication of what the market is thinking at the moment, it perhaps came from IG bond investors. All three significant GBP non-government bond issues so far this week have been FRNs (from Scotia, Lloyds and TorDom), a clear sign that the buyers of these bonds at least are not anticipating a rapid drop in UK rates. SONIA futures meanwhile had a quiet day by recent standards, largely unchanged barring gains of up to 2.5 ticks in the greens.

In ASWs the 5y cheapened from opening levels to end around 17.7bps (-3.2) while the long end continued to richen with the 30y at -56.6bps (+1.1). The cash breakeven curve meanwhile steepened, pushing 5bps higher in 30y to 3.49%. 

Barclays: Choose ASW shorts over steepeners to reflect Summer supply

Strategists at Barclays have reflected on last week’s DMO release of the Q2 2023/24 supply calendar, which is as heavy in 10y to 15y supply as it is short in ultralong supply, and offers its view as to why steepeners aren’t the best positioning for the Summer.

It notes that “interest in gilt steepeners has increased based amid expectations of weakening data and in anticipation of the DMO’s supply schedule. While sympathetic to curve steepeners, we note the heavy summer supply in the 10-15y sector. We recommend selling gilt 15y asset swaps as a safer structural view.”

“This,” it concludes, “offers better protection against the front end, but is more of a story for the summer as, should data continue to shake the market, the establishment of longs in the front end will again face the risk of a positional washout. But in contrast, the supply story will remain in place. So rather than favouring a steepener, we recommend selling Gilt 15y ASW spreads at OIS+37bp, with a target of OIS+47bp and stop at OIS+32bp. The trade has negligible roll and carry of over three months.”

New issues: Scotia, Lloyds, TorDom

• Bank of Nova Scotia has priced two £500m, 1y FRNs at SONIA +50bps via Nomura.  

   

• Lloyds Bank today priced a £1.25bn, 5y Covered FRN at SONIA +50bps via BMO, BNPP. HSBC, Lloyds (B&D) and Santander.

   

• Toronto-Dominion yesterday priced a £850m, SONIA +70bps, 5y FRN at par via Barclays, CIBC, HSBC, Lloyds and TorDom.