GBP Swaps: More outperformance, flattening

Chart up line Oct 2022
After a hefty move yesterday gilts carried some momentum through to this session to outperform Bunds and USTs.

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  • More outperformance

  • BNPP: Front-end move overdone?


    More outperformance

    After yesterday’s massive rally in gilts following weak UK, US and EU PMI data, today gilts impressed by extending that rally as more, frankly grim, economic data was released in the form of the CBI’s August reported retail sales survey.


    The headline kerplunked down to -44 from -25 a month ago versus a forecast -15, adding just another small, second-tier, bit of evidence that the MPC’s hikes are biting hard. While it didn’t have an immediate impact at the time of release, it provides more food for thought for bulls to chew. By the 4:15pm end of play 10y gilt yields had outperformed Bunds by 5bps and USTs by 7bps in falling 4bps to 4.52%.  


    Elsewhere, 5y gilt yields closed down 1bp at 4.47%, and 30y ended -5bps at 4.64%, while in ASWs the 2y was -2.6bps at 62.6bps, the 10y was +0.8bps at -8.2bps and 30y was stable at -59bps. And in linkerland, 5y breakevens were -4bps at 3.80%, 10y was -2bps at 3.73% and beyond 10y the curve was solidly unchanged.


    In futures, the ongoing gilt roll gathered pace, with volumes in the Sep 23 gilt future nearing 490K as it rallied 56 ticks. BNPP offers its roll view here. SONIA futures meanwhile had a quiet one, their hard work having been done yesterday. The strip closed little-changed at all points in volumes that still scream ‘Summer’ and which peaked at 34k in the Dec24 contract, which did actually rally 2 ticks along the way.


    BNPP: Front-end move overdone

    Strategists at BNPP said today that the parallel rally across the GBP fixed income curve should probably be replaced by more of a flattening move, and by the close today it seemed the market had come to a similar conclusion.


    BNPP noted that in the wake of yesterday’s impactful PMI outturn, it is now re-pricing in a terminal rate of 5.8%, encouraged by the  27bps drop in 1y1y yesterday that reversed almost all of the previous week’s sell-off.


    However, it adds that in relative terms, “We think the front-end move is overdone given the relative weight of PMIs versus labor and inflation figures,” and said it can envisage some more “flattening to curve on (a) further 10y gilt move.”