GBP Swaps: Gilts straddle the divide; Barclays hedge shrinks and shortens

Gilts straddle the divide

Two sessions and two 25bps rate hikes by the giant economies to the East and West of the UK kept gilts quiet in the middle of that sandwich today. Neither hike was a surprise but subsequent strong US GDP and durable goods data has seen USTs weaken steadily since trading got going in New York this morning, with 10y UST yields now 9bps higher since last night.

In the Eurozone, the expected hike and accompanying lack of a promise of more to come saw Bunds and other core European markets rally. Bund yields dropped 8bps, before the UST move cancelled out those gains to leave them roughly flat on the day.

In the UK’s pristine economic bubble hopes are rising that the MPC is near its own rate peak, and with it meeting next week, gilts were balanced in their reaction to moves elsewhere. With little in the way of domestic drivers of the market, gilts hovered between these two opposite forces and ended the day +4bps at 4.311%, neatly between the two moves in an 8bps rise in 10y UST yields and little change in Bund yields.

On the curve, at the 4:15pm close, 2s/10s gilts was +3bps at -69bps and 10s/30s was +1bps at +14bps, with the 2y gilt yield raising 6bps, dragged by the tractor beam of USTs after that GDP data. At 5.00% the 2y yield remains settled in a range 50bps below its early June peak.  SONIA futures ended the day +3 ticks in the reds while there was a peak rise of 5.5 ticks in Mar24.

Elsewhere, just as UK PLC crumbles before our eyes, there was interesting news for the under-pressure housing market. Grotesquely bloated and societally damaging house prices may be a national disgrace, but have at least served to lull homeowners into a sense of security that has supported consumer spending.

Recently sliding house prices have raised the apocalyptic fear of nobody in the UK having any money at all. But the recent dip in inflation and hopes of an imminent rate peak have prompted a handful of banks to this week lay down the gauntlet and cut their mortgage rates. Led by a 10bps cut in its benchmark mortgage rate, HSBC has been followed by a number of lenders including Co-operative Bank and Accord mortgages, raising hopes (among homeowners anyway) that the housing market won’t crash, and activity will pick up. Which would also benefit traders of shorter-dated GBP fixed income.

At the end of trading today the 2y ASW was -3.2bps at 65.3bps, 5y was -0.7bps at 34bps, 10y was -0.5bps at -5.5bps and the 30y ASW was +0.3bps at -53.8bps, the ASW aping the steepening move in gilts.

Barclays FICC down 22%yoy, structural hedge shrinks and shortens

Barclays shares are down by as much as 5.3% today after the market was disappointed with a 6%yoy fall in the bank’s second quarter income along with the reduced outlook for the bank’s net interest margin.   In the investment bank, FICC revenue fell by 22%yoy to £1.2bn with lower results in Macro reflecting “lower volatility and client activity”.

Barclays’ said that its structural hedge notional (see https://www.totalderivatives.com/articles/1163059/gbp-swaps-fed-turns-down-volume-lloyds-to-trim-hedge) fell to £256bn at the end of June from £263bn at the end of December, and the average duration of the hedge shortened to around 2.5y from 3y.  Even so, the hedge contributed a gross £1.639bn in H123, up from £879m in H122. It’s expected to generate around £3.6bn in FY23 as a whole and at least £3bn in FY24, with £50-60bn in hedges maturing in FY24 and FY25.

Alongside the small fall in Barclays’ hedge, Lloyds Bank yesterday said that it expects a “modest” reduction in its hedge notional in the second half of 2023, due to changes in its deposit mix.

RBC: MPC to hike by 25bps next week

RBC today said that it expects the MPC to hike by 25bps next week. It said that "there was enough in the MPC's language (at its last meeting) to suggest that they thought that the 50bps increase in Bank Rate that was announced would be a one-off move."

Further supporting its view, says RBC, "will be the forecasts that will be published in the latest MPR which we expect to show downward revisions to both growth and inflation forecasts." It sees a peak of 5.5% in the Bank Rate.

BNPP: Or maybe 50bps?

While conceding that it is a close call between 25bps or 50bps of hiking by the MPC at next Thursday’s meeting finale, strategists at BNPP opt for the more hawkish option as the most likely.

Citing recently stated concerns voiced by the BOE about rising rents, services inflation and the labour market, BNPP says that: "While we see it as a close call, we think that the MPC will err on the side of another 50bp hike at the August meeting."

A decision to go for 50bps, concludes BNPP, might also reflect the fact that “the BoE only has limited time before it becomes an international outlier.” With BNPP strategists reckoning that the Fed has hiked its last hike for now, and predicting a September end for the ECB, “the BoE only has a couple of opportunities to tighten rates without becoming the last hawk standing.”

New issues

• Iceland BondCo, which funds the frozen food supermarket chain, not the volcanic country of the same name, yesterday priced a GBP/EUR bond issue split between a £265m 4.3y NC2 bond at a yield of 11.125% and a €250m, NC1 FRN which came at EURIBOR +550bps. Via HSBC (B&D) and JPM.