GBP Swaps: Steeper as front end gains pre-BOE

BOE MPC Bailey May 2022
The front end of the curve gained and even long gilts outperformed USTs heading for this week's MPC decision, despite the outside chance of 50bps.

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  • Steeper as front end gains pre-BOE

  • BofA: 25bps and 1-7-1

  • New issues: NBN, NBC


Steeper as front end gains pre-BOE

Unexpected weakness in gilts early doors in the wake of Fitch’s decision to downgrade the US - and ahead of the BOE decision later this week - was partially reversed as the day wore on. The future came back from lows around 94.71 to head for the close around 95.00, still 12 ticks into negative territory. And while US bonds’ negative reaction to the refunding announcement (see Total Derivatives ) allowed 10y gilts to narrow the spread to Treasuries by around 9.5bps to 27.8bps, bringing yield parity back into sight for the first time since late March, long gilts lagged again versus Bunds as the EGB curve bull-steepened.


Gilts also underperformed versus swaps, echoing a similar move in USTs, and 5y gilt asset swaps narrowed to 32.5bps (-1.8) while 10y cheapened to -9.0bps (-1.6) and 30y spreads came in to -55.1bps (-0.8) as the 10s:30s box rose further.


The short end of the curve performed better today, despite the outside chance of a 50bps hike tomorrow (see below). SONIA futures rose by up to 9 ticks in the reds with decent volume in the whites of around 50K for Sep23 and Dec23.  


SONIA forwards for the meeting this week fell by a bp and the curve is pricing a 33bps hike in BOE Bank Rate to around 5.33% tomorrow,  with an eventual peak of around 5.80% now seen arriving at the Dec23 meeting, followed by around 50bps of easing by the end of 2024, beginning in the second quarter.  Of the 61 (!) economists polled for the Bloomberg survey, a minority of 16 (26%) forecast a 50bps hike this week  although the hawks include Barclays, Lloyds and HSBC.


The pre-BOE front end rally allowed the curve to steepen with 2s/10s up another 6.4bps to -57.2bps, taking the move over the last week to +15.7bps. 5s/10s rose to -3.7bps (+3.6) and 10s/30s steepened  a touch to 14.9bps (+1.7).      


Finally, with the short end rallying, US-led risk off dragging the FTSE-100 down by 1.4% and Brent $1.9 lower, RPI swaps finished 2-4bps weaker at the front end. However, beyond 5y the RPI curve was little changed.  


BofA: 25bps and 1-7-1

Previewing the MPC meeting, analysts at BofA today look for a 25bps hike and an unusual 1-7-1 formation with one vote each on the Committee for no change (Dhingra) and 50bps (Mann), versus seven for 25bps.   


In response to a 25bps move, the bank expects a BOE policy of ‘higher-for-longer’ to support steepeners and suggests paying forward real rates. And BofA can’t rule out a larger move this week:


    “Not all data surprises have been to the downside, so we cannot rule out another 50bp rate hike in August. But it seems less likely than it was in June. Market pricing of 37bp is reflection of these two possibilities.


    “A shift in the Committee's focus towards the average setting of policy, with the implicit intention of reducing the peak in rates but extending its duration, could draw the market's attention to the latter. The market taking out/postponing Bank rate cuts could be the next catalyst for front-end curve steepening.


    “Governor Bailey's remarks at Sintra about short-lived rates peak as priced in by the market seem noteworthy to us also. Our read is that we will not get the rate cuts without the confidence that inflation is well on the way to target. And it is not at all clear that rates will fall any faster or further than inflation (i.e. real policy rates could actually continue to rise for a prolonged period). A market pricing a return to negative real rates seems overly ambitious. High-for-longer should be supportive for paid forward real rates.”


New issues: NBN, NBC

  • Australian telco NBN Co Limited yesterday sold a £100m 12y GMTN 5.77% due Aug 2035. Lead is Westpac.


  • NBC yesterday sold another £50m 1y FRN due Aug 2024 paying SONIA +48bps. Lead is Credit Agricole.  Issuance of similar notes in July from a variety of names totalled around £3bn.