GBP Swaps: NFP adds to steepening momentum

Mountain goat steep cliff 21 Jun 2021
The combination of heavy gilt supply and slowing inflation is raising expectations of an Autumn of steepening curves. NFP supported that narrative.

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  • NFP adds to steepening momentum

  • Citi: Gilts have bullish potential but high risks suggest steepening

  • New issues: IDS


    NFP adds to steepening momentum

    The DMO’s FY 2023/24 Q3 issuance plans (see RBC’s view here GBP Swaps: DMO calendar) published yesterday focused minds on the weight of upcoming supply next quarter and, even more, in the following quarter.


    Meanwhile the hope that fundamentals are beginning to drag inflation lower has been supportive of the front end, leading strategists (see Citi below) to start promoting steepening trades. This played out today after US NFP printed a roughly on-target headline number (+187K versus forecast +170K for August) and some lowering of previous numbers.


    This triggered a strong bull-steepening in 2s/10s USTs, with 2y -6.5bps and 10y little-changed, which was aped in a diluted way by gilts.


    So while the steepening trend is sticking out today and making an early bid to be a big seasonal influence, a more general response to the US NFP data is probably relief. The 10y gilt is little-changed now the dust has settled and with the US shut on Monday the last thing the fixed income market probably needs at this point is a massive outlier of an NFP number to grapple with.


    As the last week of Summer trading conditions ends with the first big data release of the Autumn, the curve is firmly at centre stage in terms of market focus. Approaching the London close SONIA futures are +1-4 ticks in the whites and up by 3-4 ticks everywhere else. The 2y gilt yield is -2bps at 5.11%, 10y is +1bp at 4.37% and the 30y is +3bps at 4.63%.


    In swap spreads the 2y is -4bps at about 60.5bps, 10y is -1bp at -10.3bps and 30y is -0.7bps at -58.8bps. And in linkerland, the real yield curve has steepened very slightly, while breakevens are +2bps in 5y at 3.86%, and +1bp across the rest of the curve.


    Citi: Gilts have bullish potential but high risks suggest steepening

    Having outlined their upbeat view of the EGB market for the remainder of this year, strategists at Citi turned their attention to gilts in research published yesterday. Citi said that “our bullish view into year-end is even greater for gilts where we forecast 10s to 3.95% in 4Q23. Again, this view has survived the August sell-off with the rally back gaining momentum.”


    “This is mainly a front-end story. A hike on 21 September still seems most likely (but)… any hike will be evidence-driven, and there is another round of data to come with wages on 12 September and CPI on 20 September.”


    Pill’s comments on Thursday that his preferred path for policy rates was more ‘Table Mountain’ than ‘Matterhorn’ is, said Citi, “a timely reminder of the main message from August, namely that the BoE believe the inflation target can be met without any further rise in Bank Rate “


    “The main risk to our bullish view on long-term gilt yields is (that…) domestic demand appears to be trending lower. This week’s latest BoE Bankstats data show domestic (non-bank) net buying of just £1.6bn in July (the lowest since last December). Overseas net buying also slowed to £4.6bn, the lowest since March… pent-up demand may be over, but supply will keep coming. The upshot is that supply could still be a drag on gilt performance.”


    "Putting this together," said Citi, "the obvious argument combining front-end led bullish potential with ongoing gilt supply risk is for a steeper curve."


    New issues: IDS

    • International Distribution Services IDS (Royal Mail) (BBB) plans EUR 5y and GBP 7y bonds via BNPP, Commerzbank, NatWest, SEB and UniCredit after meeting investors from Sep 4.