GBP Swaps: ASW longs seek redemption; Buy-ins back

Chart numbers 14 Jun 2022
Asset swappers eye the front end of the curve and wonder where cash from a looming gilt redemption will end up. Buy-ins get busy again.

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  • ASW longs seek redemption

  • Buy-ins kick off 2023 season

  • New issues: CA, RBC, EDC


    ASW longs seek redemption

    With the slowdown in activity in the latter part of last week, after a brisk start to 2023, and given further breathing space by MLK Day in the US, GBP fixed income traders’ minds were free to indulge in a little bit of planning ahead of what is expected to be a second wave of busy times in late January.


    As well as supply (including the £19bn of now complete BOE unwind sales, plus a net £44bn from the DMO), the highlight of which this week is the birth of a new £5bn 3.5% 2025, there is also the other end of the telescope. The sad day when an ageing gilt goes to meet its maker.


    At the end of this month comes the £33.8bn redemption of the Jan 2023 gilt. After a three year tour of duty, the gilt bows out at an interesting time for short-dated ASWs. Just to recap the last 12 months for ASWs, the 2y ASW started 2022 at 40bps, then in Autumn, the madness sent it up to 142bps, since when it has dropped to 64bps, a move that includes a 30bps drop in the last ten days, which nonetheless leaves it historically still very wide. 


    In the 5y ASW, a year ago it was 27bps, it peaked in Nov at around 98bps and is now 42bps. By comparison, for all of the 2020-21 period it traded in a -20/+20bps range.


    With the UK normalising since the Autumn, albeit subsiding into a stable landscape of fiscal, economic and social bleakness of the sort unseen for over forty years, short-dated ASWs have been normalising too, with issues related to risk, repo and supply, as well as the slowing mortgage market, driving the sharp fall towards less wild levels.


    Looking ahead, one long-serving swapper said this afternoon that he has been mulling resisting the continuation of that drop, in the short term at least. “I got rid of my shorts last week, possibly a bit early,” mulled the veteran. “Basically, at the end of the month you’ve got nearly £34bn of Jan ’23 redemptions, and most of that money presumably has to go somewhere and, presumably, that will be in the shorter bucket of the gilt curve.”


    Certainly, as the above trader implied, there has been no change yet in the trajectory of those falling front end asset swaps. But the swapper said that with the market now having a mini-lull, helped by US holiday and data-driven pauses, when the markets get whirring again it might be with a different approach to front end ASWs.


    Today has seen front end spreads cheapening, but it is noticeable that in this, admittedly quietened, session the trajectory is much more gentle than has often been the case lately. And that is despite a lumpy day of bond issuance in 3y, 5y and 7y GBP (see new issues below). Shortly after the close the 2y ASW was -1.8bps at 64bps (after average drops of 3.7bps per day for the last week including this session) and the 5y was just -1.5bps lower at 42.2bps.


    In longer swap spreads, a session that saw early weakening followed by a recovery, the 10y ASW was last -0.5bps at -13.8bps and the 30y was +0.7bps at -52.6bps. By this point the 10y gilt yield had recovered to just +1bp at 3.38%, while the 2s/10s gilt curve was -1.1bp at -10bps and 10s/30s was -1bp at 34bps.


    Short sterling stood out for its belly weakness with whites from Jun23 and reds selling off 1.5-4.5 ticks today, possibly aided by Rightmove data showing that asking prices in the Terminator-like UK property prices are unexpectedly rising again, after three months on the canvas, which might see a little hawkish thinking seep into MPC minds.


    Inflation had some of the air sucked out of it by the news that gas futures dropped another 15% at times today after threatening to stabilise last week. RPI swaps moved 17bps lower in the ever-busy 1y to 4.08% and 30y was -2bps at 3.28%.


    In supply, the BOE APF auction saw a bid/cover of 2.17 times for its £650m sale and the 4.5% 2034 accounted for much of the activity, with £774m of bids and £387m of accepted bids.


    Buy-ins kick off 2023 season

    The first sizeable pension de-risking transactions to be unveiled this year came in the form of a £2bn British Steel buy-in by L&G.


    Tata Steel, which owns British Steel, said that the pension insurance transaction benefited from using existing long-term assets of the scheme “perfectly matching a proportion of the scheme and thereby protecting the scheme from a potential future mismatch between asset and liability valuations.” The scheme is now 60% hedged and plans to cover the remaining 40% in 2023 H1. 


    And it was also revealed that a £400m buy-in by the Amey OS Pension and handled by PIC has gone through. Amey is a UK highway infrastructure company.


    New issues: CA, RBC, EDC

    • Credit Agricole today priced an £850m, 4.875%, 6.75y bond at gilts +160bps via Barclays, CA, Lloyds (B&D) and Nomura.


    • RBC priced a £650m, 5-year, 5% bond at +165bps via NatWest, RBC (B&D) and Santander.


    • EDC has priced a £400m, 3y Feb 2026 bond at gilts +77bps via Barclays, JPM, Nomura and RBC (B&D).