GBP Swaps: Flatter as 2061 snapped up; L&G likes big buy-ins

Chart line 30 Jan 2023
Gilts bull-flattened after the 2061 auction was snapped up and a BOE dove remained steadfast. In the news, L&G revealed its appetite for big buy-ins.

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  • Bull-flattening as 2061 snapped up, dove speaks 

  • Legal & General ready for big pension buy-ins, still committed to LDI

  • New issues: Saltaire, Land Secs


    Bull-flattening as 2061 snapped up, dove speaks 

    Gilts tracked Bunds higher and the gilt curve bull-flattened, shrugging off the arrival of £2bn in 2061 gilts at today’s auction.   


    The DMO achieved solid bid to cover of 2.81 for the 2061, at an average 3.821% yield. The bond rallied strongly from 9.30 AM onwards into and out of the auction, hitting 3.70% at 4pm before backing up to finish around 3.74%. A full £500m was sold at the PAOF on the back of the gilt's strength.


    Writing before the sale, RBC reckoned that dealers were “still short in the sector” and highlighted that the £665m cash auction size was the smallest since the IL55 in Sep 2008 and also “by far the smallest ultra-supply (5-10x less in DV01 terms) that the market has had to absorb in some time – and looks tiny relative to the size of ultra supply events of late.”  Ahead, RBC suggests that the DMO is likely to launch a new 40y in the next quarter to replace the 2061, in line with requests from investors.


    At the short end, white and red SONIAs finished 1-4.5bps lower after failing to hold afternoon gains. Dovish MPC newbie Swati Dhingra remained true to her reputation, using a speech in London to warn against “overtightening” when household budgets are being “squeezed”. Dhingra recommended holding policy steady given signs that “external” price pressures are easing. SONIA futures now imply a peak for BOE Bank Rate of around 4.96% in Sep23 versus 4.00% today.        


    Along the curve gilts 2s/10s flattened by 5bps to go back below zero to -1.6bps. 5s/10s flattened by 2.6bps and 10s/30s by 1.4bps as the 30y gilt rallied. Meanwhile the asset swap curve steepened with 5y spreads off session lows but still down again at 33.5bps (-2.0), its cheapest level since Feb 2022. In contrast 30y rose a touch to -59.0bps (+1.4).


    Finally, inflation cheapened across the curve led by the front end as bull-flattening in real yields failed to keep pace with nominals. Cash breakevens narrowed by 1-4bps.   


    Legal & General ready for big pension buy-ins, still committed to LDI

    Legal & General reported its 2022 results today and the fund giant’s bulk annuity and LDI businesses were a particular focus.


    L&G said that the UK is the “most mature" pension risk transfer (PRT) market globally” with £1.4trn of UK DB pension liabilities, of which only an estimated 14% has been transferred to insurance companies.


    L&G continued: “Demand for PRT is growing as rising interest rates and widening credit spreads reduce pension deficits and allow more funds to consider de-risking…Our stated ambition is to write circa £8-10bn of UK PRT per annum,” a flow of new business that L&G regards as “self-sustaining”, i.e. the growing amount of capital generated by its annuity book more than offsets both the capital investment required to fund new business and the portfolio’s contribution to the dividend.


    And as attention turns to big pension buy-ins in the wake of the recent RSA deal (see Total Derivatives), L&G says that “there may well be opportunity to bid on additional large, or very large, PRT transactions over the coming years.” It added: “We are well positioned and have appetite to write this additional business, subject to it delivering on our key new business metrics. We will consider any large incremental transactions as ‘M&A’-type activity, funding it from our strong stock of solvency capital as required.”


    As for LDI in the wake of the Kwarteng disaster-Budget collateral doom loop, L&G said that “over the course of 2022, we experienced positive flows into LDI. However, and as noted, overall DB revenue decreased as interest rate rises caused assets under management to reduce and as clients sold higher fee-generating products to meet collateral requests.” It remains “fully committed” to its full range of 'Solutions' products.


    In other news, Spirent Communications said that it had agreed a £142m pension buy-in with PIC in Q4 2022, advised by LCP.


    New issues: Saltaire, Land Secs

    • Government-backed housing finance provider Saltaire Finance (Aa3) today priced a £350m (£100m retained) 30y secured bond with a 4.809% coupon to give gilts +63bps. Lead is RBC. Books around £870m.


    • Land Securities (AA/AA-) today priced a £400m (£100m retained) 9.5y Green secured bond with a 4.875% coupon to give gilts +133bps. Leads are BNPP, Lloyds and NatWest (B&D). Books around £900m.