GBP Swaps: Gilts let off steam; Peaks everywhere

• Gilts let themselves go before the hard work

• BNPP: Data in focus as peaks eyed in peak-time

• New issues: Nestle, RBC, MAG and HSBC

Gilts let themselves go before the hard work

After rallying 16bps peak-to-trough last week, 10y gilt yields, along with the rest of the curve, gave its bullish drive the day off today. Instead it indulged in some bear-steepening assisted by hawkish overnight headlines from the powerful central banks of Japan and China.

Shortly after the close of play today the 10y gilt yield was +7bps at 4.765%, the 2y was +1bp at 5.045% and the 30y was +7.5bps at 4.77%. And in swap spreads, on a day when the new season really started to resonate with GBP bond issuers, apart from a 0.6bps nudge higher in 2y to 58.8bps, the rest of the curve was pretty much 1.5bps more negative.

The outright underperformance of gilts was attributed in some quarters to an edging higher of UK inflation expectations in a public survey, to 4.4% in the August survey, from 4.3% in July. But given last week’s move, the temptation to take a bit of profit ahead of a significant week of data, accelerating gilt supply, and the MPC next week, seems more probable.

That said, the £650m APF gilt sale today of gilts in the 2026-2029 bucket attracted an unusually strong bid/offer ratio of 3.55 times. Given the short duration of this return to APF supply, perhaps the heavy demand, as well as the outperformance of the front end today, shows that despite easing off today, belief that the rate cycle is about to face the force of gravity might be stronger than bald price action today suggests. Elsewhere, the MPC's Catherine Mann remained hawkish but red SONIAs came off session lows at the close to finish 3-4 ticks softer. 

BNPP: Data in focus as peaks eyed in peak-time

The GBP fixed income market is in a phase of peak data dependency as it tries to establish if rates themselves have peaked. Looking to tomorrow, BNPP strategists said that “all eyes will be on the labour market data and, in particular, the earnings figures. We and consensus expect pay pressures to remain hot, coming in at  7.8% y/y in July far in excess of the rates consistent with the 2% inflation target. That said, this would be consistent with a very gradual easing back in higher frequency measures of pay growth, suggesting momentum may be ebbing a little.”

“These data have been heavily revised in recent months with revisions typically skewing to the upside, so we will also be on the lookout for changes to the back data. We also expect the unemployment rate to tick up a little further, but likely remain below the level the BoE consider to be consistent with the labour market being in balance.”

The average Bloomberg forecasts for tomorrow’s data show July average weekly earnings coming in at +8.2% yoy and the August unemployment rate nudging up to 4.3% from 4.2%.

New issues: Nestle, RBC, MAG and HSBC

• Nestle has priced an £800m, two-tranche bond split equally between a 3y at gilts +67bps and a 12y at gilts +80bps via Barclays, Goldman, HSBC, JPM and RBC (B&D).

   

• RBC has priced a £750m, 3.5y Covered FRN at SONIA +63bps via Barclays, Lloyds, RBC (B&D), Santander and Standard Chartered.

   

• Manchester Airport Group has mandated Barclays, BNPP and SMBC to lead an 18y GBP secured bond issue.

   

• HSBC UK plans a £500m, SONIA-linked Covered Bond issue via itself, BMO, CIBC, IMI, Lloyds and Santander.