GBP Swaps: 10y outperforms; Issuance; SONIA views

Financial chart 24 Nov 2021
The 10y area of the curve outperformed a touch today following the gilt auction. Basis flows pick up with a trio of IG issues. Banks look at SONIA.

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  • 10y gilts outperform; Gas inflates RPI 

  • Keep paying Nov23 MPC SONIA: JPM

  • New issues: BNPP, Caterpillar, MuniFin, NBC


10y gilts outperform; Gas inflates RPI 

Another low volume session was enlivened by a 10y gilt auction and a trio of 3y to 5y corporate deals today with cable trading multiple times down to -18.625bps in 4y and -19.75bps in 5y (see the SDR) before coming back to unchanged at the close.  Similarly the asset swap curve steepened as the front end cheapened up to finish at 32.1bps (-2.6) in 5y versus -57.1bps (-0.7) in 30y.


Along the curve, gilts outperformed Bunds and just about up kept up with 10y USTs with the future heading for the close around 20 ticks higher in volume of 180k. 2s/10s flattened a touch further to -55.1bps (-0.9) while 10s/30s steepened to 19.8bps (+0.5). The DMO sold £3.5bn in Jan 2033 gilts with satisfactory bid to over of 2.6 times and the gilt outperformed on the curve following the auction.


Finally, the front end of inflation benefited from a surge in gas prices following a vote in favour of strike action at LNG facilities in Australia. The front Dutch natgas future rose 27% and tested €43.5 before coming off to just below €40. The 2024 RPI fixings rose and RPI 1y popped up to 3.81% (+8bps) while 2y rose to 3.98% (+4bps), compared with losses of 2-3bps at the long end of inflation.


Keep paying Nov23 MPC SONIA: JPM

With Sep23 MPC SONIA implying 21bps of tightening to around 5.46% for Bank Rate and Nov23 pricing an additional 16bps to 5.62%, JP Morgan suggests paying the curve on the expectation that the BOE will deliver a further 50bps of rate hikes before year end. It writes:


    “We still expect the BoE to hike to 5.75% by November (25bp in September and 25bp in November). Between now and the September meeting there will be two sets each of labour market data and inflation data (15th and 16th Aug, 12th and 20th Sep) which will be critical to calibrate the BOE’s reaction function over the coming months, but absent a large exogenous negative growth shock or a large decline in service price inflation we expect the BoE to hike Bank Rate twice more.”


One reason for the forecast is that JP Morgan expects growth in average earnings to print higher than the BOE would prefer, and hence the bank recommends paying Nov23 MPC SONIA:


    “Wage growth is more likely to surprise to the upside in the coming months given the long run of persistent surprises with the BoE expecting pay to be running at 6% by the end of this year…We keep tactically paying Nov23 MPC OIS.”


And even if the BOE decides to pause, JPM expects the Committee to retain a hawkish tilt:


    “We acknowledge there is some risk the BoE could stop hiking in September, but either way we think that if the BoE stops hiking in the next few months that the risks are more tilted to a hawkish pause with the possibility of a resumption of rate hikes potentially in 2024. The MPC’s language around keeping rates restrictive for a significant period of time implies the BoE sees a lengthy gap between the end of their rate hike cycle and the start of any potential rate cuts.”


Elsewhere, Barclays reckons that the BOE’s tightening bias – skewed towards being exercised at the less frequent MPR meetings – suggests opportunities in early 2024:


    “What might happen in H2 24 is an open question, but the MPC’s use of the term “sufficiently” implies a lower likelihood of easing in the early part of 2024. This implies that the Feb-24/May-24 spread can continue steepening until the May-24 fly is more closely in line with the Nov-23 and Feb-24 structures. While outright exposure to the Feb-24 meeting can be volatile, the curve spread or micro fly is likely to be favoured as a way of being long the highest part of the near-term expectations path.”


New issues: BNPP, Caterpillar, MuniFin, NBC

  • BNP Paribas sold a £750m 6y NC5 6% due Aug 2029 at gilts +155bps. Books around £1.6bn and self-led.


  • Caterpillar sold a £500m 3y 5.72% due Aug 2026 at gilts +97bps. Lead is Barclays.


  • Munifin sold a £250m short 4y 5.125% due Jul 2027 at gilts +60bps. Leads are Barclays, BofA and Citi (B&D).  


  • NBC yesterday sold another £127m 1y FRN due Aug 2024 paying SONIA +48bps. Lead is Commerzbank.  Issuance of similar notes in July from a variety of names totalled around £3bn.