GBP Swaps: Day of two halves ends on worrying note

Tumbleweed 4 Dec 2020
Gilts did something of a round trip today in a session that ended with some possible source of worry for GEMMs, the DMO and the BOE.

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  • Day of two halves ends on worrying note

  • PIC: BAT buy-in completed in third phase


    Day of two halves ends on worrying note

    A day of two halves saw major bond markets (gilts included) rally with the aid of weak German inflation data (10y gilt yields rallied as much as 9bps to 3.22%) before giving it all back as the latest QT event cheapened up the front end. The rest drifted in line with Bunds and USTs after they gave away early gains, while still outperforming gilts (Bund yields closed -6bps on the day).


    A bitty kind of session saw both gilts and equities embark on half-hearted rallies, only to run out of steam in the afternoon. Gilt futures volumes were at their lowest for a couple of weeks at about 153K and it seems that after repricing twice since the MPC’s vote, the market is somewhat in need of a driver, with many expecting US CPI on Tuesday to play that role.


    A big week of supply today saw the BOE take centre stage in the absence of any rival offers from the DMO. It’s £650m of  QT unwind sale today focused on the front-end of the curve and saw only £713.0m of bids and £621.2m of them accepted, with the BOE free to use its discretion regarding acceptance of bids, even if the £650m target is not met as a result.


    GEMMs would be right to point to a week of heavy gilt supply, in what was a few days ago a highly volatile market, for the weak bids today. But with the APF unwind very clearly a marathon, not a sprint, GEMMs and the BOE, and the DMO, will have felt a twinge of anxiety as they ponder just how far there is to go.


    The 5y focus of today’s supply saw the 0.125% 2028 gilt place £193.4m out of £193.4m of bids, the 6% Dec 2028 also saw a full £162.9m of bids accepted, while the July 2027 got  £202.3m of bids, but only £110.5m of them were accepted by the Bank.  


    By the 4:15pm close today SONIA futures were 1.5 to 6 ticks lower at most points of their curve with that weakness extending to shorter gilts with 2y and supply-soaked 5y gilt yields ending the day 4bps higher at 3.48% and 3.22% respectively. A range of BOE speakers today included doves (Tenreyro), hawks (Haskel) and centrists (Bailey and Pill).


    All across the curve early gains were handed back from 1:35pm onwards, but 10y and 30y gilts still ended in the black after 10s/30s flattened back through the morning to end at 44.6bps (-1.0) while 2s/10s fell back by 5bps.


    In swap spreads the front end cheapened again reflecting supply conditions and the BOE operation, with the 5y ASW -3.5bps at 44.8bps while  10y was +0.2bps at -10.4bps.


    Price action in linkerland was muted, with 1y RPI dipping just 1bp to 3.86%, while swaps moved higher at all other key points of the curve, but only by 2-3bps.


    PIC: BAT buy-in completed in third phase

    Pension Insurance Corporation (PIC) has concluded a third pension insurance buy-in with the Trustee of the British American Tobacco UK Pension Fund, insuring about £250m of liabilities, PIC reported today. PIC has now insured all £4.1bn of the Fund’s liabilities, covering the pensions of 10,000 members.


    PIC reflects that “the first buy-in was completed in May 2019 and the second in 2021. This final buy-in was completed in October 2022, which is a very long delay between execution and announcement even by the standards of this necessarily discreet sector.. This latest buy-in means the Fund is the largest pension scheme in the UK to have insured all its liabilities through a series of buy-ins phased over time.”


    Mitul Magudia, Head of Business Development at PIC, said: “This transaction underlines the excellent relationship formed between the Fund, its advisers, and PIC. This relationship has been fostered over the last four years, since our initial transaction in May 2019. These three linked transactions have moved the market forward in respect of what is possible in the risk transfer market. We expect the approach taken here to form a template for a number of large schemes currently preparing to move to insurance.”