GBP Swaps: Philly wobbles SONIA; Auction soft; MPC

SONIA biggest mover as auction unnerves

Summing up the gilt market as another 4:15pm close started to hove into view, one longstanding market participant told Total Derivatives that since the open, notwithstanding some wobbling around within a range, “gilts are unchanged, the curve is unchanged, the only thing really moving is SONIA, and it is following signs from the US.”

Supporting this view, the 10y gilt yield is currently +2.5bps at 4.265%, while 30y is also +2.5bps, although the 2y is sharing the front-end liveliness at 4.925%, +5bps. Most of the SONIA curve is -5 ticks at the time of writing, barring the whites which are -1-3 ticks.

The source said “the front-end is following the US, which has been hit by the Philly Fed non-manufacturing index (an often erratic bit of data surpassed itself by coming in at +1.4 in July versus -16.6 last month) and SONIA has done well of late so the sell-off is a bit of profit-taking but not a big deal.” US house price and consumer confidence data also surprised to the upside.

Potentially more worrying, said the source, was today’s £3bn auction of 2038 gilts which saw a decent bid/cover of 2.56 times (versus 2.26 at the last tap four weeks ago) but which priced on the soggy side.

“The auction was slightly weak, it was trading at the time at 103.52 but the lowest accepted bid was 103.49… It’s probably just summer trading but it’s hard not to worry that it’s a sign of things to come,” he said.

Elsewhere, the trader said that the next few days will inevitably see the gilt market CB-surfing, as it is dragged one way or another by first the FOMC and then the ECB. After that it has only to wait until Thursday next week to discover what the MPC will do to address the colossal problems continuing to bring the UK down. In the latest bit of good news, the FT reports that the BOE's QE portfolio is now in the red by £150bn if interest rates follow the forwards (link).   

Late in the session swap spreads are -1bp in 2y at 65bps, in 10y they are -0.5bps at -7bps and the 30y ASWs is +0.3bps at -54.2bps.

SocGen: No repeat of 50bps hike next week

Talking of that MPC meeting and strategists at SocGen said the BOE’s rate-setters will resist the temptation to cut rates by 50bps again. Just. It says that “We believe the MPC will hike by 25bp at the August meeting to address the signs of more persistent inflationary pressures that have developed since the previous meeting. Namely, the continued overshoot in pay growth.”

It said that “the other indicators of persistence, services inflation and labour market tightness, have eased since the previous meeting, meaning a 50bp hike could be avoided. After the August meeting, the data should still point to the need for more tightening but again by 25bp to 5.5%. Thereafter, softening data are likely to convince the MPC that it has done enough to bring inflation under control, albeit slowly.”

New issues: KfW

• KfW today braved the burgeoning storm of summer inactivity to price a £300m tap of its Jul 2026, 1.25% bond at gilts +52bps via MS and TD (B&D).