GBP Swaps: Narrow ranges; Long gilt spreads cheap

Price charts 25 Nov 2021
Gilts held in a narrow range and outperformed against a backdrop of DMO and IRBD supply. Banks find long asset swaps cheap.

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  • Narrow ranges; Cable trades as World Bank prints in 7y

  • BofA: Long gilt spreads cheap   

  • New issues: IBRD, IDS, TSB Bank


Narrow ranges; Cable trades as World Bank prints in 7y

The gilt held in a relatively narrower 69 tick corridor today before heading for the close roughly in the middle of the range and 25 ticks softer, having outperformed Bunds and USTs by 2-3bps at 10y.


Still, gilts 2s/10s bear-steepened by 4bps to  -69.5bps with most of the move arriving around close, as the 2y gilt rallied by 3bps. Further out, 5s/10s was little-changed at -27.3bps and 10s/30s flattened by -1.6bps to -27.3bps.


Supply arrived in the shape of £4bn in 4.5% 2028 gilts, which saw satisfactory bid to cover of 2.47 and the bond outperformed against its neighbours on the day.  


£850m in issuance also arrived from the World Bank with 7y asset swaps offered early doors before richening back to 18.7bps (+0.4) at the close, while the long end of the asset swap richened to -59.8bps (+1.2) in 30y. Cable basis traded a few times and was better bid in 7y, starting at -21.625bps and finishing at -21bps.    


Comments by various BOE officials to the Treasury select Committee of MPs included remarks by Governor Andrew Bailey, who said that rates are likely “near the top of the cycle”. The market’s response was to steepen the money market curve as SONIA futures rose by up to 2 ticks in the whites but fell by 4-6 ticks in the greens.  


Finally inflation fell by 4bps at the front of the RPI swap curve and lost a bp at the long end as Dutch gas futures lost almost 10%.


BofA: Long gilt spreads cheap     

It's now time to "lean against" long gilt swap spread cheapness, according to analysts at BofA this week.


They note that at the long end, gilts trade "as cheap to Sonia as Treasuries do to SOFR, while at the front, they look "almost as rich as Bunds vs €STR".


BofA cites the supply pattern of the DMO and BoE combined for this, and the demand preferences of different investor types. But it adds that "doesn't make it any less striking." The bank explains:


    "Soaring pension fund solvency, or at least estimates of solvency, are a double-edged sword for long Gilts. Yes, it might accelerate de-risking, but only for the shrinking portion of the pensions universe as yet unhedged. And with the desired end-game often a full buyout (Hymans estimate that there was a record £25bn of risk transfer activity in H1), the insurer preference for credit instruments over Gilts is a concern, especially for Gilt swap spreads.


    "The steady slide in 30y GBP xccy is no doubt symptomatic of this, with the hunt for credit product driving insurers overseas. We actually regard this xccy move as mildly encouraging for long Gilts, insofar as the currency hedge costs eat into credit's regulatory advantage (the matching adjustment), particularly if it means that the xccy "pipe" is now a bottleneck constricting throughput.


    "The big issue is what (the BOE) does for its next QT year, beyond September. We assume it will increase the total amount of QT to £100bn for the year from the September MPC (keeping the active amount similar to this year)...The Bank is selling a disproportionately large share of longs...We consider the case for selling these 1-3y Gilts to be quite strong - their scarcity is reflected in their richness on repo and versus swaps, and by selling fewer longs the Bank would not be front-loading the crystallisation of losses so aggressively."


    "Even with the working assumption that the Bank does not change its pattern of active sales, we believe it's time to consider opposing the wide Gilt 10y5y spreads...We would enter the trade at 133bp, targeting a tightening to 80bp with a stop-loss at 160bp. We see the risk to the trade being poorly digested supply in the 15-20y area."


New issues: IBRD, IDS, TSB Bank

  • IBRD today priced a £850m 7y Sustainability Global 4.875% due Aug 2030 at gilts +39bps. Leads are BofA, DB (B&D), NatWest and TorDom.


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


  • TSB Bank plans a GBP 5y Covered FRN along with  a bond tender. Leads are Banco Sabadell, Lloyds, NatWest, Nomura and RBC.


  • Yorkshire Building Society yesterday priced a £300m, 4y NC3 SNP 7.375% bond at gilts +265bps via BNPP, Lloyds, NatWest (B&D) and UBS.


  • Reckitt Benckiser PLC yesterday priced a £300m 15y at gilts +93bps, a €650m 5y at swaps +45bps and a €750m 10y at swaps +75bps. Leads are BNPP (B&D), BofA, SocGen and SMBC.