Three tailed US auctions in a row now, and a 2bp tail on the 30yr is a big price miss – a message that the US curve should be higher and steeper. A hawkish cut by the is a good reminder that sterling rates should not blindly follow the dovish mood in the US. Slowing the pace of quantitative tightening would not help the record 30Y gilt yields ease much.
Another Auction Miss in US — 3 in a Row Have Tailed Now
The US saw a 2bp tail (effectively a concession to implied secondary market levels), which price-wise, on account of its duration, is the most impactful auction miss of the week. Three auctions have tailed in a row this week, which is quite something. It suggests a degree of discomfort on where the curve is currently pitched; a message from the auctions that the curve should be higher. And based off the 30yr auction, steeper too. All three of the auctions this week have managed to take the shine off the bond positive impulse that we had post last Friday’s payrolls report.
In the end, the front end of the curve will remain responsive to actual delivery of Fed rate cuts in the months ahead (should they occur). But the further we go out on the curve, the less is the conviction that the response will be for lower absolute rates. An interesting aspect of the 30yr auction was the response of both the 30yr yield and the 30yr SOFR rate. Both rose post the auction. There was no material widening in the 30yr swap rate. That suggests that the 30yr auction was poor not because of a (Treasury) credit issue, but more on account of an absolute rates issue. A cut in the funds rate may not be enough to change that, resulting in a steeper curve, likely from both ends.
Bank of England: A Hawkish Cut and QT Not Blamed for Record Gilt Yields
Sterling rates struggle to resist the dovish mood in US rates, but the Bank of England (BoE) meeting reminds us that the UK is still in hawkish territory. We did get a cut, but the communication and votes split was not supportive of more cuts to come in the near term. Markets now only price a full 25bp cut by February, which deviates from the quarterly pattern priced in earlier. The correlation with US dynamics is always very high for sterling rates, but we think this meeting should push for more of a disconnect. If the front end of the US curve dives lower on increased Fed cutting expectations, GBP rates should this time think twice before following suit.
The BoE also provided an analysis of the impact from Quantitative Tightening (QT) on gilt yields, but the overall tone does not warrant a dramatic change in bond sales. In September the Bank will decide on whether to continue reducing the gilt portfolio by £100bn per year, which is relatively fast compared to say the pace of QT of the and . Quantifying the impact is difficult but the BoE actually attributes most of the rise in longer-dated gilt yields to global factors, whilst QT only plays a relatively smaller part. Slowing down the pace to around £80bn per year could ease the upward pressure on 30Y gilts, but doesn’t change the structural backdrop. Markets would probably have to gain more confidence in the (global) fiscal outlook before the back end of the curve would ease lower.
Friday’s Events and Market Views
Very little on the agenda in terms of data and events. We do have the BoE’s Chief Economist Pill speaking, which should be of interest after Thursday’s meeting. No significant government bond issuance scheduled.
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