GBP Swaps: Soggy sale as yields boomerang; Are gilts new FTSE?
Soggy sale as yields boomerang
Today’s £4.5bn sale of the Oct 2025 gilt was very much on the soggy side, traders said this evening, after the mid-morning sale attracted a bid-offer of 2.08 times and cleared at an average yield of 4.151%, a level it failed to improve upon for the rest of the day.
It ended the day at 4.20%, having briefly spiked up to 4.265% as global fixed income had a brief wobble on initially hawkish headlines from Fed Chair Powell’s testimony at 3pm London time.
More tellingly perhaps, the sale of the gilt which was already described by strategists as ‘cheap on the curve’ tailed by 3bps. Its auction coincided with the high watermark for the curve as yields rose sporadically as the day wore on after a bright start.
The bright start was attributed by some to the RBA, which hiked Aussie rates 25bps overnight as expected, but it was a more dovish hike than expected, triggering a kind of ‘canary in the coal mine rally.’
But if the RBA is a canary, the Fed is the giant American eagle, and some hawkish nudges from Powell ensured that gilt yields ended the day well off their early lows, although the 10y still closed 5bps lower than yesterday at 3.81%.
The big move in the curve was flattening with 2s/10s gilts flattening 6bps and 10s/30s flattening 2bps as the overnight rally partly reversed in a flattening formation. In swap spreads the 2y pushed 7.6bps higher to 49.5bps, 5y was -0.3bps at 35.5bps, 10y was +0.4bps at -12.4bps and the 30y was -0.7bps at -60.4bps. But the biggest mover was the SONIA strip, which took particular umbrage at Powell’s words today, with the back whites and reds selling off 10bps or more led by Sep23 after heading south from 3pm.
Tradition: Gilts heading the same way as the FTSE?
In an interesting piece from brokerage Tradition, strategists there asked today if gilts are heading the same way as the FTSE? Namely towards a diminution of their scale and significance.
Tradition notes that “at the start of the 21st century London’s stock market accounted for 13% of global equity value, it now accounts for just 4%.” (Note, that’s the 21st Century, not 20th!). It asks, “Do gilts now face the same danger?”
The danger it refers to is the boom in pension de-risking, which has recently seen record deals (see GBP Swaps) and expectations from all those who express opinions on these things that pension de-risking is set for a sustained boom.
Tradition says that “DB pensions are incentivised to hold gilts, but they are no longer such large buyers having moved from deficit to surplus (and of course became forced sellers last Sept/Oct). This surplus now stands at a considerable £374.4bn according to the PPF7800 index. This puts the employers in a stronger position to engage in buyouts which transfer the schemes to insurers.”
The danger is that insurance funds are subject to different regulations to DB schemes, and having had gilts transferred to them as part of a DB buyout, may not be inclined to hang onto them, given the availability of better-yielding assets. As Tradition puts it, “the insurers won’t just be reluctant buyers of gilts, they could actively sell gilts as they reshape the portfolios they take over.”
“In summary, there are definite concerns regarding support from pension funds for the gilt market going forward, especially in the area of long gilts and index-linked gilts which have been their preferred areas to invest in (around 70% of DB gilt holdings are in linkers according to the ONS).”
New issues: Sanpaolo, Coventry B/S, Cadent, Mizuho, NATS
- Intesa Sanpaolo has priced a £600m 6y NC5 Green SNP at gilts +285bps via IMI, JPM, MS and NatWest. Books were above £1.2bn.
- Coventry Building Society has priced a £500m 5y SONIA-linked Covered FRN at +50bps via Barclays, JPM, NatWest, TorDom and UBS.
- Cadent Finance, the fundraising arm of Leicester-based gas supplier Cadent Gas, has priced a £300m, 11y Green Bond at gilts +178bps via Lloyds (B&D), MS and RBC.
- Mizuho has priced a £500m, 5.25y, 5.628% bond at gilts +183bps via Barclays, HSBC, Lloyds and NatWest.
- Air traffic control group NATS (En Route) plc has priced a £145m tap of its 1.75% Sep 2033 bond via Barclays, BNPP, Lloyds and NatWest. Gilts +128bps.