GBP Swaps: 2053 arrives to rallying market; DMO talk

Good reception for 2053 in rallying market

Gilts rallied by 3-5bps across the curve after UK PMI data showed the service sector and the composite PMI headline figures both shrinking and coming in weaker than forecast in the provisional January data.

While that might have helped set the tone for gilts, of more dynamic interest to the market was the sale today of a larger-than-expected £6bn (£5bn was widely forecast) of new 2053 gilts. The main highlights include a strong orderbook in excess of £68bn and a slightly wider-than-expected spread at pricing of 2.75bps over the 2052 benchmark (see new issues below).

Reflecting on the sale, Kerr Finlayson, Head of FBG Syndicate at syndication bookrunner NatWest, told Total Derivatives that “I think however you look at it, it’s an outstanding result. When you reflect on where the UK was just a few months ago (the benchmark 2052 yield hit 5% in September for example, versus 3.72% at the time of writing), today’s outcome shows a lot of investor confidence in the UK has returned.”

As is typical of gilt syndications, especially longer-dated ones, he said that the investor base “was predominantly from the UK and driven by the value in the bond, with a welcome smattering of offshore investors, which was encouraging to see. It’s very important to send a positive message about UK supply at the start of the calendar year and also ahead of a financial year of high levels of supply.”

He added that consensus for the size of today’s syndi was £5bn “so this is a really strong outcome following a few challenging issues recently. The plan was to execute quickly and smoothly, and that’s what happened.”

At the time of writing the gilt curve was outperforming all-comers, led by the front end where 2y yields are -5bps at-5 3.39%, 10y is -3bps at 3.33% and the 30y is -3bps at 3.68%. In swap spreads the 5y is +1.4bps at 46.5bps, 10y ASWs are +0.4bps at -11.1bps and the 30y is unchanged at -47.8bps. SONIAs are 1- 2bps stronger as that weak PMI data raises hopes of a nearing peak in base rate and in linkerland, breakevens are -5bps in the 5y and +2bps in longs. The inflation extrovert, 1y RPI swaps, was -22bps at 3.72%, again with a firm eye on the 11% fall in Dutch gas futures that started late yesterday, and the soft UK data today.

GEMMs and investors eye shorter-dated issuance

The DMO today published a summary of the meeting it held with GEMMs and gilt investors yesterday afternoon to discuss the broad approach to what will be a mammoth year of issuance next financial year.

In a nutshell the main theme to emerge from the meeting was a preference among both GEMMs and investors for a greater proportion of short-to-medium dated issuance versus longs next year compared to 2022-23, reflecting concerns about the shape of the yield curve and the extra long-dated supply due from the BOE’s QE unwind.

Otherwise there was broad-based support for more Green issuance, possibly in new maturities, and  for a continuation of syndications at proportions similar to 2022-23. Views were expressed by both GEMMs and investors supporting a smaller proportion of linker issuance next year, due to the much larger absolute issuance target, although some investors also called for a slightly larger share of linker supply.

Looking at the consultation’s minutes, strategists at RBC noted today that “A key reason for the caution on long end demand is the view (which we share) that a healthy bulk annuity programme will lead to significant Insurer selling of gilts acquired on risk transfer from pension funds.  There was further support for forecasts of a big year for bulks in Barnett Waddingham’s latest DB End Gauge report which showed that over the course of 2022 there was a halving in the average time DB pension schemes need to be financially ready for buyout.”

The gross financing requirement for 2023-24 is currently projected to be £305.1bn, as published alongside the OBR’s Economic and Fiscal Outlook on 17 November 2022. The DMO’s financing remit for 2023-24 will be published alongside the Budget on March 15, following an updated OBR EFO.

New issues: UK

• The UK today priced a £6bn, new Oct 2053, 3.75% gilt at 2.75bps over the benchmark 3.75% 2052 gilt.  Leads were Citi (B&D), Deutsche, Goldman, NatWest and Santander.