GBP Swaps: PMI loses three points, gilt surges two points

Up arrow 8 apr 2022
Weaker-than-expected PMIs in the UK and beyond sparked a big rally across the curve with the gilt up two points and red SONIAs +26 ticks.

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  • PMI falls 3 points, gilt surges 2 points

  • Gilt roll likely to widen: BNPP

  • New issues: BBVA, Deutsche PBB, DMO


PMI falls 3 points, gilt surges 2 points

A big rally across the curve today began with weaker-than-expected Eurozone purchasing managers indices (see Total Derivatives EUR Swaps), gained momentum with the release of equally soft UK PMIs and then got fresh legs with the arrival of a softer-than-forecast US PMI report. With shorts under the cosh, the git future headed for the close two points higher, its largest move since SVB and the US regional bank crisis sparked a bout of risk-off in March 2023.


The unexpectedly sharp fall in the manufacturing and services PMIs – the latter tumbled back below 50 and into contractionary territory for the first time since January 2023 - point to “very negative dynamics” in manufacturing, according to economists at Barclays today. Forward-looking indicators such as new orders and input purchases also declined, the bank noted, leaving firms “leaning heavily” on their backlog of orders. 


5y yields marginally led the gilt rally, falling 19bps to test 4.48%. But 10y yields also fell by 18bps to move below 4.50% for the first time since August 11 and the long end retreated to 4.69% in 30y, down 14bps, after 30y yields threatened to reach 5% last week. 2s/10s steepened to -46bps before coming back to end little-changed at -48.8bps, 10s/30s rose steadily to hit -23bps (+3.8) and 30s/50s ended a touch steeper at -46.3bps (+0.4) as the DMO confirmed that next month’s syndication will be a tap of the 4% 2063, as expected.


Against Bunds, 10y gilts tightened by around 5bps to 195bps while spreads to USTs narrowed by 6bps to 25.7bps. There was less movement versus swaps: 5y gilt asset swaps cheapened to 33.9bps (-1.4) as issuance arrived from BBVA but 10y richened marginally to -9.1bps (+0.4).


SONIAs rallied by 21-26 ticks in the reds in volume of up to 51K in Sep24. MPC forwards now imply a peak for BOE rates of 5.89% in Feb24, with 28bps of tightening still priced for the Sep23 meeting and 64bps by early next year. For the mortgage market, 5y swap rates are back below 5% and 2y rates are 5.6% after both rallied by around 20bps today.


Linkers were unable to keep up with the data-driven rally in nominals with the result that cash breakevens tightened by 2-4bps across the curve, with the softening in the UK PMI price balances and fall in Dutch natgas futures adding to the disinflationary signs. Real yields rallied by 9-15bps led by the shorter end of the curve with IL33 RY falling by 16bps to 0.784% after breaking 1% on Monday.        


Gilt roll likely to widen: BNPP

Volume in the Sep23 gilt is 322K at the time of writing versus 124K for Dec23 contract with the both the roll ad the near two-point surge in the future both boosting volume. BNP Paribas today surveys the outlook for the roll:


    “We believe its fair value is primarily driven by the financing of the current CTD (UKT 0.625% Jul-35). The estimate of the roll's fair value is around -31 pence, wider than its current trading value of around -17 pence...The relatively richer pricing of the front month probably points to a short base in the future. However, base is hard to judge with little movement in open interest over the cycle...Negative carry means that market participants favour early delivery...We expect the roll to widen from current levels, likely beyond -20 pence."


New issues: BBVA, Deutsche PBB, DMO

  • BBVA today priced a £300m 10.25y NC5.25 Tier 2 sub 8.25% bond due Nov 2033 at gilts +360bps. Leads are BBVA. Lloyds (B&D),NatWest and Nomura.  


  • Deutsche PBB today priced a £250m 3y Covered FRN at SONIA +68bps. Leads are Barclays, BMO, Nomura (B&D) and TD.


  • DMO plans a syndicated re-opening of the 4% 2063 gilt in the week beginning Sep 4.