Borrowing data supports
After a lamentable Summer spell for gilts there was some solace today as a slower-than-expected rise in UK government borrowing (£56.6bn for the Apr-Jul period versus the OBR forecast of £68bn) offered some relief for beleaguered fixed income, while in the EUR area current account data for June posted its biggest jump (into surplus) since 2015.
Bund yields were last down about 6bps at 2.64%, and gilts have managed a slight outperformance with 10y gilt yields 8bps lower as the curve drops in a roughly uniform fashion.
The recent rise in yields has seen an early awakening of the IG issuance market (see new issues), and of course set the basis for today’s hearty rally. Other good news today for UK PLC is that its debt-to-GDP ratio, it transpires, is not, and never has been, running at 100%, although the ONS did note today that it is running at 98.5%, or £2.58trn, which still doesn’t feel great.
But while there were assigns of life again today after a busier-than-expected Monday and ahead of the high-volume mayhem of the dreaded Autumn, the heart of the market was still on pretty Summery form, with gilt futures volumes 207K and the SONIA strip trading mostly in 25-35K size as it rallied 5-6 ticks at most points in the curve.
At the end of the session the 5y gilt yield had clawed back 7bps of its recent weakness (it has risen 37bps in yield in two weeks) to reach 4.68% and the 30y is -9bps, at 4.83%. In ASWs the 2y is +2.6bps at 64.6bps, 10y is +0.9bps at -9.5bps and the 30y is +1bp at -59.6bps.
Over in linkerland, the front-end of the breakeven curve was unchanged, 10y was -2bps and 30y was -3bps.
RBC: Possible Oct-Dec supply tweaks and scope for ASW weakeners
In its Oct-Dec quarter outlook published yesterday (see GBP Swaps: Gilts outperform; 10y RY at 1%; DB surplus talk) the DMO signalled its expectations for 15 auctions (11 conventionals and 4 linkers) in Q3 23/24.
Strategists at RBC updated its expectations for what form those auctions will take, saying that it sees:
- Shorts (4 auctions): Our expectations are unchanged at 3H25 (x1); 4H28 (x3)
- Mediums (4 auctions): Our expectations have changed at New34 (x3); 0s33 (x1) – "In Oct-Dec, the DMO has scheduled just 4 medium auctions. With the DMO looking to launch a new 10y bond, we think there is an additional incentive for the DMO to stick to its pattern of 1 10y auction per month, to bring the issue up to an appropriate size as quickly as possible. Hence, this makes the launch of the new 10y bond on 11th October very likely. We think the final auction slot will be used to tap the 0s33s (Green 10y) as… the DMO specifically mentioned the bond in the agenda.”
- Longs (3 auctions): Our expectations have changed at 3T53 (x1); 1H53 (x1); 1e73 (x1) – "The DMO mentioned both the 3T53s and 1H53s – hence leaving just 1 auction slot for, we think, either for the 1e39s, 0s46s or 1e73s. Given our expectations for the DMO to launch a new 20y gilt via syndication, we think the 1e73s are the likely choice of bond.”
- Linkers (4 auctions): Our expectations are unchanged at IL33 (x2); IL39 (x1); IL51 (x1) – "We do not expect a linker syndication in Oct-Dec and hence think 4 linker auctions are most likely."
Looking at syndications, RBC says that its expectations of one conventional and possibly a linker in the quarter are unchanged. If the DMO opts for a linker RBC says that there is a risk it will be shifted out to the Jan-Mar quarter and a big Mar 22 redemption. "For the conventional syndication, we maintain our initial view that the DMO will opt to launch a new 20y gilt following calls from GEMMs in the Jul-Sep consultation ‘a new gilt maturing in 2043’) and suggest a 31st January 2043 maturity would be most appropriate to smooth the redemption profile.”
Finally, looking at trade ideas related to supply, RBC said “with the number of short auctions remaining unchanged in Oct-Dec vs Jul-Sep, but there being no conventional gilt redemptions in Oct-Dec vs 2 in Jul-Sep, net supply of shorts will return to positive territory following a very negative quarter – which should weaken short-end spreads.”
New issues: Santander, CCDJ, Deutsche Pfandbrief
- Santander UK has priced a £500m, 6y NC5 at gilts +258bps via itself, Barclays, JPM, MS and RBC.
- Federation de Caisses Desjardins du Quebec has priced a £500m, 3.25y Covered FRN at SONIA +64bps via BMO, Lloyds, NatWest and RBC.
- Deutsche Pfandbrief has mandated Barclays, BMO, Nomura and TorDom to lead a GBP-denominated 3y fixed-to-floating rate Covered Bond in the near future.