GBP Swaps: Belly leads as gilts outperform; MPC vs CPI

Chart up line Oct 2022
Gilts outperformed across the curve following weak GDP data and ahead of upcoming central bank meetings. Ahead, strategists look to the MPC and CPI.

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  • Belly leads as gilts continue to outperform

  • Firming up expectations for the MPC but CPI key

  • New issues: Manchester Airport; 1y FRNs 


Belly leads as gilts continue to outperform

Gilts performed strongly across the curve today with the future up 80 ticks at the close and finishing the session near the day's highs. 2s/10s steepened up to -58bps in early trading before coming back down to -62.9bps (-1.4) at the end while 5s/10s similarly rose to test -19bps before flattening back to -21.4bps (+1.0).   


Weaker-than-expected monthly GDP data (-0.5% versus the -0.2% consensus) and generally benign US CPI allowed the market to gain, led marginally by the belly of the gilt curve. Green SONIAs were as much as 12.5bps stronger ahead of upcoming central bank meetings (see below), with the forward curve now implying a peak for BOE rates of around 5.64% in Feb24 followed by cuts from mid-year to take rates to around 5% by the end of 2024.


The market swallowed £3.75bn in 3.25% 2033 gilts at today’s auction with bid/cover of 2.38 and the bond performed in line with the rest of the curve on the day.  Despite the supply, 10y yield spreads tightened by a further 7.7bps against Bunds and 3.6bps against Treasuries. However, versus swaps, 10y gilt spreads cheapened a touch to -14.5bps (-0.5) while the long end richened with 30y spreads at -61.1bps (+0.8) as the 10s/30s asset swap box steepened back.


Finally, inflation bull-flattened before and after US CPI and despite the nominal gilt rally, with the move helped by a late surge in gas futures following reports of LNG outages. 1y RPI swaps rose 9bps to 4.96%, 30y RPI gained a bp and linker real yields rallied by 9-11bps led by the front end of the curve.


Firming up expectations for the MPC

The ECB and the Fed both precede the MPC’s decision next week, with the market currently pricing around 16bps of tightening for the ECB, 1bp for the Fed and 20bps for the BOE. Ahead of the meeting, the MPC will also get key CPI/RPI data, with the reset market pricing a temporary pick-up in RPI inflation to 9.265% from 9.0% in July on the back of higher oil prices. Still, the BOE’s focus will likely be on the various measures of headline and underlying CPI.


Against this backdrop, banks are starting to firm up their expectations for the BOE meeting. Barclays, for example, expects the MPC to make “one final hike” of 25bps in a 1-7-1 vote, with continued emphasis on rates “remaining restrictive for a prolonged period.”


However, the bank acknowledges that “significant” downside news in the August CPI release could still cause the MPC to hold rates unchanged t 5.25%. Barclays also expects BOE QT to be “accelerated slightly” to £100bn at the September meeting. The bank explains:


    “Data since the August decision has not delivered a clear enough signal for the MPC to deviate from current market pricing of a 25bp hike at this meeting, in our view. Timely activity indicators and unemployment, for instance, suggest a softening relative to expectations. Regular wage growth in July showed only tentative signs of a turning point, with forward-looking surveys suggesting it will fall but remain stubbornly persistent. A hike decision is not a foregone conclusion though. The Bank’s August forecast variant based on leaving rates unchanged at their current levels showed that the MPC considers holding Bank Rate at 5.25% to be one possible path consistent with achieving its inflation target.”


Elsewhere, RBC also expects the BOE to deliver a 25bp hike but is marginally less hawkish on the likely pace of QT: 


    "This meeting will mark the end of the current cycle. The last meeting minutes saw the MPC describe the current policy stance as “restrictive” and the Governor has subsequently followed up on that insertion to say that the MPC was ‘much nearer’ now to ‘the top of the cycle’. We doubt very much that the MPC will in any way signal a pause that at this meeting. Rather it will want to keep its options open going forward and we think the current hiking bias in the language will be retained.


    "Our expectation is that the MPC will keep the amount of outright gilt sales fixed at around the current amount of £45bn and adjust the overall envelope to reflect the larger amount of redemptions over the next 12 months which would equate to an overall QT envelope of £95bn."


New issues: Manchester Airport; 1y FRNs  

  • Manchester Airport has priced a £360m 18y secured bond 6.125% due Sep 2041 to give gilts +155bps. Leads are  Barclays (B&D), BNPP and SMBC.


  • RBC has priced a £600m 1y FRN due Sep 2024 to give SONIA +42bps. Self-led.


  • HSBC has priced a £150m 1y FRN due Sep 2024 to give SONIA +45bps. Self-led.