GBP Swaps: Dove down! 2y yields soar; Steepeners?

Dove down! 2y yields soar; Strong APF; Water bonds

The MPC has not so much lost a dove, as gained a hawk. That seems to have been the message received loud and clear by the GBP fixed income market as the gilt curve went on a fierce bear-flattening move this morning albeit one that faded somewhat into the afternoon and close.

First up today, in an interview published by the FT this morning, MPC newcomer Greene offered a taster of the kind of feelgood factor she might bring to the party by warning that current interest rate levels could remain permanently as our new robot overlords from AI drive growth.

Meanwhile the outgoing Tenreyro warned recently against over-hiking and encouraged waiting for existing hikes to take effect. Those worried about self-inflicted recession will mourn her departure.

Anyway, Greene's cheerful views sent the front-end on another spectacular underperformance journey, with the 2y gilt selling off as much as 13bps, to 5.38%, before closing at a more subdued +7bps at 5.32%.

SONIA futures had a very low volume day but followed a similar path before reaching 4:15pm 12 ticks lower in the Mar25 contract, but unchanged in the front contract. On the gilt curve, 2s10s closed 2bps flatter at 90bps and 10s30s was -3bps at flat. In ASWs there was little drama as the 2y closed -0.3bps at 61.6bps, while 10y closed +0.3bps at -3.7bps and 30y was-0.3bps at -63.3bps.

Over in linkerland, where fascination with all things aquatic might just be pausing for breath, linker real yields lagged moves in nominal yields with much of the B/E curve little changed but for 5y at -4bps at 4.04% and 10y which was -3bps at 3.84% (CORRECTS). 

In terms of supply today, the APF resumed hostilities with a well-received £790m sale of 2026-2029 gilts that saw the 1.625% 2028 gilt emerge as the most bid (£1.05bn) and most sold (£389m), with honourable mentions going to 0.375% 2026 and the 11.5% 2026, which has £336m of bids accepted between them. The best-selling Oct 2028 cleared the APF at about 4.7525% and closed around 4.71%.

Gilts had sold off in a bear-flattening formation ahead of the APF but immediately after the APF front-end yields plunged about 5bps lower, suggesting a happy-enough day for buyers there.

And in linkerland, news of Thames Water’s predicament was in short supply today, but with major shareholders in the company on Friday showing support for its recovery plan (one suspects they have little choice) the moves in its bonds have been supportive, with its £600m 2037 bond’s yield dropping from 7% at noon on Friday to 6.8% this lunchtime, since when it has been treading water.   

Meanwhile Severn Trent has been calling for a consortium of water companies to stand up against any nationalisation threat. Some might want to see the board members of both Thames and Severn drink a few pints of water from their eponymous rivers before making too many demands.  

NatWest: Supply matters; July could see flatteners retreat

In what is proving a timely observation, strategists at NatWest write that:

• “The UK has led the way in the global fixed income flattening, with little news or data to drive it. Much of it has been about positioning, we think, which should be much cleaner now… supply risks should still dominate recessionary concerns at the longer-end of the curve and push yields higher still. It is…worth taking a look at just how flat the curve is today vs more than twenty years of history.

   

• "Much of the pushback we have had against the steepening view in gilts is that although the curve is extremely flat, it has been flatter. And perhaps more importantly, it has been flatter with front-end rates at today’s level. This is true for 10s30s. But those periods of flatness only occurred in the early 2000s, following the burst of the dot-com bubble and the global financial crisis of 2007-8. Arguably, these were periods of extreme flatness against a much different macro backdrop and supply-demand backdrop than we are experiencing now."

   

• “2023 has taught us that supply does matter for gilts. Although well telegraphed, we continue to think that a pick-up in supply in July can help reverse some of the relentless flattening that we have seen this past week.”

New issues: Principality

• Welsh mortgage giant Principality Building Society today mandated BNPP, Barclays and Lloyds to lead a GBP 5y Senior Non-Preferred bond. It simultaneously announced a tender offer for its outstanding £300m Nov 2023, 2.375% bond. If all goes to plan the new bond should match the size of the Nov 2023.