GBP Swaps: Flattened by Canadian bear; 2025 auction; Late linker drop

Flattened by a Canadian bear; Late inflation selloff

Treasuries and SOFRs were unsettled by the Bank of Canada’s 25bps rate hike this afternoon with the result that the gilt shed early gains to head for the door around 50 ticks lower while 2s/10s flattened by almost 5bps to -31.2bps, its lowest level since late February.

Direct read across from Canada to the UK may be limited given the North American central bank’s expressions of concern about “excess demand.” Still references by the BoC to tight labour markets and underlying inflation sounded more familiar. After Canada decided to end its rate hike pause, red SOFRs dropped by 12-14 ticks and red SONIAs fell by 7-9bps.     

Elsewhere on the curve, 10s/30s gilts also continued its downwards trajectory and flattened by 1.6bps to 24.9bps. Longer-dated asset swaps richened up again with 30y rising to -56.0bps (+0.6) while 10y was little changed at -11.5bps (-0.1). 5y gilt asset swaps fell again to 13.7bps (-4.0) as more issuance arrived. Cable basis (and EUR/USD) has been falling at the front end of the curve over the last few days amid a raft of short-dated deals, including FRNs, but the basis bounced today. National Grid announced plans for USD 5y and 10y deals but the utility has extensive operations in the US.

Finally, inflation rose with cash breaekvens 3-6bps wider led by the front end following modest gains for gas futures and Brent. The buying of linkers around the close that has been spotted over the last couple of sessions was not repeated today as 30y real yields surged by 5bps to 0.96% shortly after 4pm, while breakevens lost around the same amount.

Cheap 3.5% 2025 outperforms after auction

The DMO sold £4bn of the 3.5% 2025 gilt at today’s auction, getting bid to cover of 2.34 at 4.874%. Short gilts sold off following the Bank of Canada hike but the bond outperformed on the curve to finish at 4.95%, up 7bps on the day     

Writing ahead of the sale, strategists at RBC found the gilt understandably cheap on RV given plans by the DMO to tap the bond twice in the Jul-Sep quarter. The bank continued:

“Given that the bond will continue to be tapped regularly for some time, it will continue to trade structurally cheap. However, we do think that the recent cheapening of the bond has taken valuations to historically stretched levels opening up tactical RV opportunities.

It suggested “tactically buying the 3H25s on the 0F25-3H25-0e26 cash/ASW fly” with the bond seen “equally attractive on both the ASW and cash versions of the fly” before concession begins to build again ahead of the next reopening on July 5, while the launch of a new 5y gilt on June 20 is seen putting pressure on gilts in the 5y to 10y area of the curve.  

New issues: Weir, CA, Close Brothers, Yorkshire BS, Westpac 

• Weir PLC is pricing a £300m 5y Sustainability bond due Jun 2028 to give gilts +250bps. Leads are Citi, HSBC, JPM (B&D) and Mizuho.  

   

• Credit Agricole today priced a £400m 8y SNP 6.375% due Jun 2031 to give gilts +218bps. Leads are CA, HSBC, RBC (B&D) and Santander.  

   

• Close Brothers today priced a £250m 5y 7.75% due Jun 2028 to give gilts +355bps. Leads are BofA, JPM (B&D) and UBS.  

   

• Yorkshire BS today priced a £500m 5y Covered FRN due Jun 2028 at SONIA +50bps. Leads are BMO, Lloyds, NatWest and Nomura.  

   

• Westpac today priced a £500m 1y FRN due Jun 2024 at SONIA +44bps. Lead is Rabo.