Swarm of slight issues lifts gilts; Barclays eyes roll
The fixed income bulls’ old friend, bank stress, returned to give the market a lift today as a move by Moody’s to lower credit ratings on ten small-to-medium US bank names shared the limelight with a surprise tax on the Italian banking sector by the national government.
Also, said one longstanding gilt market participant in London this evening, “German inflation weirded people out a bit today. Not only was it unchanged but also exactly as forecast for July. And the day started with a lot of weak overnight news from China, especially the drops in imports and exports and weak China property prices, which saw European bonds get off to a strong start.”
“Basically,” he said, “there were a lot of weak pattern stories this morning that supported gilts.” He said that the focus away from central bank actions and towards macro-economic factors may have supported “something of a reversal of curve-steepening.”
Overall though he said today was a quieter day even than yesterday, and said the low volumes (typically 30K in SONIA futures and 145K in gilt futures) added to some of the volatility.
At the close today SONIA futures were mostly unchanged, while 2y ASWs were unchanged at 61.5bps, 5y was +0.8bps at 34.7bps and the 30y was +0.7bps at 56.4bps. RPI swaps were down between 2-3bps across the curve.
Also in linkerland, the DMO today sold £900m of IL39s at a RY of 0.986%, higher than the last such tap on April 12 which came at 0.334%. The above tap had a highly respectable bid/cover of 2.62 times versus 2.65 times previously. It closed at 99.5bps, having rallied from 102bps early on to 95bps at lunchtime.
Barclays: Looking to the gilt roll
Looking ahead to the upcoming gilt roll, strategists at Barclays said the CTD bond for both the front and back contracts is the 0.625% July 2035. However, it said a 20-30bps rally by gilts could see the 4.25% 2035 gilt propelled to the role of CTD.
Positioning-wise, earlier in the year Barclays saw positioning as skewed heavily to the short side as inflation clouds gathered. Now, it says, the surprise inflation dip followed by the August MPC’s hints of an end to the rate cycle in sight) take n together “may have encouraged some investors to scale back short positions.”
But the fact that neither CTD candidate has shown strong upwards or downwards momentum in recent weeks “may point to reasonably clean positioning,” added Barclays. And so far, it further noted, “little interest open interest has been rolled back into the gilt futures contract at this stage of the cycle,” which it says is broadly in line with previous cycles.
- Mercedes Benz today priced a £350m, 3y bond at gilts +93bps via Barclays (B&D), Goldman and RBC.