GBP Swaps: Steepening stalls as USTs lead way; RPI eyed

Rolled flat 21 Jun 2021
The 2y gilt continued to stalk USTs today. Having rallied 35bps this week, exactly the same as 2y USTs, they have now both reversed.

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  • Steepening stalls as USTs lead way

  • Barclays: Pinning the tail on the RPI donkey


Steepening stalls as USTs lead way

Yesterday’s continued GBP fixed income bull-steepening move in the wake of Wednesday’s US CPI data extended today, until lunchtime, as 2y gilt yields fell as much as 5bps to 5.07%, until a US-led move in the front-end of the UST curve saw the trajectory of the gilt curve reverse.


Some market participants reported yesterday that there had been bouts of profit-taking on bull-steepening trades in the front-end of the GBP curve, although that those had been outweighed by ongoing steepeners betting on ‘the pivot’ and doing so in reasonable volumes in areas such as 2s/10s. Today, 2s/10s gilts has flattened by 5bps, back to pre-CPI levels around -75.6bps..


Today though, shortly after 12:30pm and so well before the US data, the front end of the UST curve very much led a sell-off in that market that was immediately mimicked in gilts.


The symbiotic relationship between the two markets has been particularly pronounced this week. The 2y benchmark gilt and UST both had rallied 35bps this week before today’s lunchtime sell-out saw them both rise by about 8bps in rapid time. Still, while red SONIAs are +/-1-2 ticks, red SOFRs have shed up to 17 ticks of their recent strength today 


That move seems to be running out of steam at the time of writing, but with 2s/10s gilts having bull-steepened by 8bps since Monday morning, there was always going to be scope for the occasional bout of profit-taking before the final bell today.


Further along the curve and 10s/30s steepened a couple of bps yesterday after what was said to be quite lively two-way flow. Today it has so far steepened another bp as the liquidity point that is the 10y sector outperforms the wings, although the curve is drifting down from session steeps into the close.


In swap spreads the 2y has so far tightened another 4bps to 64bps, taking the cheapening move over the last 5 days to around 13bps from a peak this week of 80bps. In contrast, the 5y asset swap is little-changed at 11.6bps and 30y is steady at -54bps.


The inflation market has been choppy at times this week and now, with absolutely crucial RPI/CPI numbers looming (see Barclays below) and gas and oil futures both softer today, the front end is under pressure with 5y real yields +6bps while RPI swaps are 3-4bps lower out to 10y. 


Barclays: Pinning the tail on the RPI donkey

“A classic joke about economists is that two decimal points is proof that they have a sense of humour,” said strategists at Barclays today. “When it comes to forecasting UK RPI, our humble opinion of late is that it seems fair to narrow that to one decimal point,” they added.


Noting that the UK RPI print has surprised to the upside versus the fixings market six months in a row (by an average of 17bps), Barclays said today that these overshoots constitute the longest streak in at least a decade.


And with an eye on June RPI data coming out next Wednesday (the Bloomberg survey forecast is +0.5%mom and +10.9%yoy versus previous +11.3%yoy, while the reset market also prices a 10.9% print), Barclays said that “clearly, UK inflation thus far in 2023 has consistently proven more resilient and robust than expected, not only against our forecasts, but also the market. In short, we remain in a regime of heightened uncertainty when it comes to UK inflation.”


But despite that uncertainty, Barclays has offered an updated RPI forecast ahead of next week’s data, projecting “June RPI to print at 376.6, up a very strong 0.3% m/m (0.346% m/m unrounded) and 10.8% y/y, slightly below the latest fixing close of 376.9 (0.4% m/m). If realized, this would be tied for the lowest year-over-year reading since March 2022. Although the projected monthly June growth of 0.35% would be well below the 0.86% seen in June 2022… this is still expected to be a robust reading and, if realized, would have been the second-highest June month-over-month print from 2009-2020.”


“Given the consistency of upside surprises to RPI releases thus far in 2023, it is only fair to see upside risks to our forecast. For context, applying the recent average upside surprise of +17bp would imply RPI at 377.2 (0.52% m/m and 11.0% y/y). In essence, it is far from impossible to see a 0.6% m/m reading.”


Barclays said the main flag-flyers for inflation will be food and catering, with both expected to rise 0.8% in June, and household goods +1.5% forecast for June alone.