GBP Swaps: Supply flies; Rothesay’s busy pipe

Wrong as it may sound, but the gilt market was again a model of restraint, while a 2053 auction was snapped up. Rothesay eyes boomtime. Supply talk.

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  • Supply flies; Gilts remain voice of reason

  • Rothesay says over £4bn in the pipeline

  • DMO talk; BNPP on busy week of supply news


Supply flies; Gilts remain voice of reason

Wrong as it may sound, but the gilt market was again the model of restraint in a global fixed income landscape still shaped by SVB-CS shockwaves. The 10y gilt outperformed Bunds by 10bps today, moves that may seem to overlook the supply load that faces the gilt market, but which does at least reflect the sense that the BOE, which started hiking before other central banks, is close to the end of its journey.


Meanwhile other factors were at work when the DMO this morning sold £2bn of 2053 gilts at 3.864% and at a bid/cover of 2.71 times. At the 4.15pm close today it was priced at about 3.83%.


Strategists at broker King & Shaxson said after the sale that it was an “Uber strong 3T53 gilt auction result (with just a) 0.1bps tail, 2.71 cover and 16 ticks overbidding, which were all at the strong end of ranges for 30Y auctions over the past couple of years. And this despite a larger than usual cash size.”


“Demand,” it added, “was helped by a decent pre-auction concession, a pause in long end supply for a few weeks and 10s30s back near the cheap end of its range for the past three years.”


All good news that is no doubt gratefully received by the DMO and BOE as they ruefully eye their respective supply loads. Aside from positive supply news the big thing was the continued return of risk-on, which has held sway for all of one-and-a-half days now, and the lack of news of any bank – big or small – going bust today.


Literally not one, and that’s the second day in a row! Clearly the global economy is back on track, and with the slight hiccup of Corona out of the way, Chinese plans for peace in Ukraine blossoming, and Boris Johnson set to be exonerated after explaining his blameless pandemic-era work at No. 10, it seems that at last, nothing else can go wrong.  


Shortly after today’s closing bell rang, the SONIA strip was down just 1.5-3 ticks in the greens but as much as 17 ticks in the whites. Gilt yields were up across the board, led by the 10y which was +6bps at 3.36%, as 2s/10s steepened 1bp and 10s/30s flattened almost 4bps. After dropping heavily yesterday 2y ASWs outperformed today to be unchanged at 28bps, 5y was -0.5bps at 36.4bps, 10y was -2.2bps at -10bps and 30y -0.7bps at -60.5bps.


In linkerland, real yields were very little changed on the day meaning front-end breakevens were +5bps and 30y B/Es were +1bps.


Rothesay says over £4bn in the pipeline

Rothesay today followed PIC (see Total Derivatives) with the release of its 2022 Annual Report (link).


The insurer said that the level of interest it was seeing in pursuing risk transfers to the insurance sector was at “an all time high” following the rise in interest rates and Rothesay was looking at £4.4bn of “exclusive” business in early 2023, after taking £3.3bn in liabilities in 2022. The bank ended last year with £47.3bn in assets under management, down from £62.5bn at the end of 2021 due to the rise in interest rates. Gilt holdings fell to around 15% (£7.1bn) from 21% (£13.1bn) while investment in corporate bonds and lifetime (equity release) mortgages increased, the latter to 11% (£5.1bn) alongside £1.1bn in long-term fixed rate mortgages, mostly in the Netherlands.


Rothesay hedges its interest rate and inflation risk. Interest rate swaps rose to £26.5bn at the end of 2022 and IRS liabilities increased to £27.1bn even as the IRS notional was little-changed at £336.6bn. Inflation swap assets rose to £4.3bn and liabilities to £4.0bn on an inflation notional of £78.3bn.


The insurer stated that its liquidity position remained “robust” throughout the LDI crisis despite “large” collateral calls. By the end of the year (ie post-crisis), posted collateral had risen to £2.1bn from £444m at the end of 2021, and received collateral had grown to £5.2bn from £1.5bn. Liabilities classed as “collateralised financing agreements” (repo) also increased, to £3.6bn at the end of 2022 from £414m at end-2021.  


DMO talk; BNPP on busy week of supply news

A busy week for the mechanics of the gilt market saw the DMO meet with GEMMs and investors yesterday ahead of the announcement of its quarterly gilt issuance plan, while the BOE is to pronounce on rates on Thursday as well as make its own supply announcement.


Minutes of the DMO meeting showed a preference among investors for a syndicated linker issue, with interest focused on the 15y to 25y sector, while GEMMs expressed a preference for an IL51 reopening.


There was interest from both camps in a new 40y conventional gilt sale, with 2063 the preferred maturity and also warnings against too much long-end linker supply as there remains uncertainty about the current strength of demand out there from the usual suspects.  


In addition to that DMO supply calendar, this week should also see the MPC vote for a 25bps rate hike (or possibly ‘no change’) which strategists widely see as the last hike of this cycle. And in addition to that, the BOE is set to announce the amount and schedule for QT gilt sales over the coming quarter.


Strategists at BNP Paribas looked at that today and said that:


  • ”Although the BoE undertook low amount of sales during the first two quarters, as the impact of the late September/early October gilt market volatility delayed the start of QT, in particular delaying the sales in the long-end of the curve until late January. We see smaller amounts announced for the coming quarter..


  • "We estimate a per maturity sector proceeds amount of GBP2.85bn. However, this is merely optical, as the implied balance sheet reduction of GBP11.9bn will be greater than the sum of the proceeds, we think.


  • "Yields have risen markedly since the QE purchases, and hence the proceeds raised by each gilt sale will be lower than the balance sheet reduction it causes. To date, we see an almost GBP5bn greater reduction in balance sheet than cash raised. This imbalance is offset by the indemnity cashflows from the Treasury to the BoE.


  • "We maintain our view of a lower amount of sales which supports our positive narrative on long-end gilts.” With that in mind BNP recommends long-dated gilt-Bund tighteners."