GBP Swaps: Fading towards a flat ending; Risk transfer boom

Fog lifting
A UST-led rally in gilts is fading away to nothingness as a calm Friday follows suit. Hymans Robertson anticipates a £70bn buy-in year.

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  • Fading towards a flat ending

  • Hymans: Risk transfer market to range between £50-70bn a year

  • New issues: Cadent


    Fading towards a flat ending

    A slightly above-forecast US ISM Services index (Feb headline 55.1 versus forecast 54.5) came out at 3pm London time, causing a skip higher in UST and gilt yields that lasted for a heartbeat, but seemed to be the start of a slow fade-out towards a little-changed end to the day with the gilt just a few ticks lower.


    The improbable theme across fixed income markets these last couple of days has been calmness and today felt in keeping with that. This bodes well for next week when mainly second-tier UK data is scheduled, and not in any great quantity, which should give the market time to prepare its expectations and positioning ahead of the March 15 Budget the following week.


    The most common trick from a gilt perspective in recent Budgets has been for the Treasury to find ways to undershoot issuance expectations, but with issuance now just one significant component of supply, there is some scepticism  regarding how much a recent improvement in the government finances can really impact the gilt market in two Wednesday’s time.


    That said, if a forecast today from RBC strategists that gilt issuance will drop to £170bn in 2023-24 (net of QE/QT, or £226bn gross) compared to its own previous net forecast of £255bn proves correct, then that may make a difference.


    Back to today though, and European bond markets were largely led by USTs during a quiet Friday session that saw a strong performance by Treasuries start to fade after that ISM data. Currently 10y UST yields are at 4.005% having dipped to 3.971% ahead of the data, while 10y gilt yields are 1bp lower 3.862% having dropped earlier to 3.835%. The unchanged 2y yield means 2s/10s has bull-flattened 0.5bp while 10s/30s is +0.2bp. Swap spreads are little changed in 2y, -1.5bp at 38.8bps in 5y, -0.6bps at -11.9bps in 10y and -0.4bps at -58.3bps.


    The lack of any gilt sales, which is still the norm for Fridays even in this era of perpetual sales, made today something of a semi-holiday, and  gilt futures volumes of 155K with 30 minutes to go until close reflected that.


    And in linkers, looking back briefly at yesterday’s IL51 auction, there was an undertone of surprise in traders’ comments yesterday about how the fairly long-awaited sale failed to create any particular buzz in the market when it came out.


    One inflation market participant at King & Shaxson today partly explained this when he said that “Regarding the IL51s auction yesterday (£650m at 0.835% RY), seems market was probably a tiny bit short and got some or enough at the auction not to have to do anything, clients (buy side) were also quiet, so not much happened (£25m only IL51s B/Es traded all day I heard).”


    Today the IL51 traded in an 80-87bps range, and was last seen neatly in the middle of that range at its auction real yield level of 83.5bps. Next week may see more tension between markets where long positions have reportedly been trimmed back to shorts while some central bankers continue to up their warnings about inflation threats.


    The sense among some traders who talked to Total Derivatives this week is that if positioning, and slightly hawkish central bankers do keep the market in balance next week (and of course, nothing ever pans out as anticipated) then the market could itself be in the market for fresh ideas by this time next week.  


    Hymans: Risk transfer market to range between £50-70bn a year

    Pension and risk consultancy Hymans Robertson said in a report published this week (link) that the pension buy-in market, which has enjoyed a record week with a largest ever £6.5bn pension buy-in by Intact/RSA (see GBP Swaps), is set to start churning over to the tune of £50-70bn a year for years to come.


    Such an escalation of buy-in activities would have a range of implications for flows in gilts and linkers. Looking at this new, sunny future for buy-ins, Hyman Robertson says:


    • "The buy-in market is expected to exceed £50bn every year for the foreseeable future, and could top £70bn in some years (the record year so far is £44bn in 2019).


    • "Insurer pipelines today are more than double their level a year ago.


    • "More multibillion-pound buy-ins are expected, following the announcement of the RSA pension schemes’ £6.5bn buy-ins.


    • "We expect 80% of future bulk annuities to be whole-scheme buy-ins or buy-outs, in stark contrast with the last 16 years having been being 80% pensioner-only buy-ins.


    • "2023 will see a paradigm shift in the pension scheme buy-in market with volumes expected to reach record highs for years to come... with a tidal wave of demand leading to record buy-out volumes exceeding £50bn, with the potential to hit £70bn over the next few years."


    Hymans said that “the material increase in long-term interest rates over the last year means that many pension schemes have seen significant improvements in their funding levels. On average, pension schemes are now only roughly five years away from being able to afford to fully insure. Popularity for buy-ins was already increasing, but this shift in market conditions has meant pension scheme demand has leapt to its highest ever level.”


    Commenting its outlook for the risk transfer market, James Mullins, Partner and Head of Risk Transfer at Hymans said: “The recent increase in demand from pension schemes to fully insure their members’ benefits has been incredible. As a result, we expect that by 2030, half of all of the UK’s private sector DB pension scheme liabilities will have been insured, covering 5 million members’ benefits and close to £1 trillion of liabilities."


    New issues: Cadent

    • Cadent Finance PLC, the money arm of Coventry-based Cadent Gas, has mandated Lloyds, Morgan Stanley and RBC to lead investor calls from Mar 6 ahead of a planned £300m 11y Green Bond issue.