GBP Swaps: Sober reflection elevates yields; MPC view

Red arrow up 2 Feb 2021
Today’s session of GBP fixed income trading ended in a bear-flattening as sober reflection followed inflation ecstasy.

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  • Sober reflection elevates yields

  • RBC: CPI outturn supports 25bps hike call

  • New issues: AfDB


Sober reflection elevates yields

Today’s session of GBP fixed income trading ended in a bear-flattening formation as gilt yields gave back some of yesterday’s gains following the refreshingly sub-forecast CPI print at the start of Wednesday’s session.


Unsurprisingly, the front end took centre stage today, with the 2y following yesterday’s near-20bps plunge lower, with a sober 8bps reversal today as the market told itself to not get too carried away.


Sober reflection created space to wonder how happy gilt bulls should really be. An aeroplane hanger-load of gilts has to be unloaded by the BOE, for example. Also core CPI didn’t actually fall at all in June, and profit-taking looked attractive today, while a 50bps hike at the next MPC meeting remains very possible (see RBC below) and the UK just feels very broke. If not just broken.


These party-pooping thoughts swirled around, egged on by a bear-flattening move in USTs driven by strong labour market data today, without fully-pooping the gains made by a surprised gilt market yesterday.   


With schools across the UK shutting down for Summer this week, volumes were low in gilt futures at about 140K and even more sub-par in SONIA futures, which sold off by 13 ticks in the Sep24-Mar25 part of the curve but volumes were below 30K at every point of the SONIA curve.   


So today’s move didn’t have any great whiff of conviction, suggesting that more thinking needs to be done, while more insight from MPC members would help to provide clarity. Today’s MPC-related headlines were restricted to Dave Ramsden suggesting the BOE could increase the annual rate of QT gilt sales from £80bn a year when the current year of sales ends on Sep 30.


At today’s 4:15pm close, the 10y gilt yield was 4.26%, +5bps, having hit a 4.11% low yesterday and closed at 4.33% on Tuesday. The 2y was +8bps at 4.96% and the 30y was +3bps at 4.41%. In swap spreads the 2y was +1.5bps at 44bps, the lively 5y was relatively subdued with a -0.8bps move to 13.5bps, 10y was -0.1bps at -5.6bps and 30y was +0.5bps at -53.5bps.


Over in linkerland, breakevens flattened with 5y +3bps and 30y +1bps, while RPI swaps were +2bps in 1y at 3.74%, 10y was +2bps at 3.81% and 30y was +1bp at 3.35%.


RBC: CPI outturn supports 25bps August hike call

After the initial sense of relief when UK CPI came in below expectations for the first time in a long time, many strategists conceded that the prospect for the next rates decision to be made by the MPC, at its August meeting had tilted slightly more in favour of 25bps versus 50bps, before deciding that it will still be a 50bps hike from the tough cookies at the MPC.


Not so RBC. Having processed yesterday’s data, RBC says that “in the wake of the decision to raise Bank rate by 50bps at the June MPC meeting we argued that the meeting minutes suggested that the MPC seemed to think that the move would be a one-off and though that they would return to 25bps rate hikes at the August and September meetings.”


Notably, says RBC “ it was the reference to the scale of the data surprises between the May forecast round and June meeting as justifying a 50bps rate increase “at this particular meeting (our emphasis) that stood out.”


So, it concludes, “Given the data in the interim, a loosening in the labour market even if private sector wage growth remains uncomfortably high coupled with the fall in headline and services CPI inflation in today’s data we retain that call for a 25bps rate increase at the August MPC and a terminal rate of 5.5%.”


New issues: AfDB

  • African Development Bank has priced a £300m, 2y bond issue at gilts +65bps. Via NatWest, RBC and TorDom.