GBP Swaps: Gilts underperform; Structural pensions shift?

Curve bend road 30 Jan 2023
Gilts underperformed as more soft US data spurred global bull-steepening. Commentators flag up some implications of the shift in pension de-risking.

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  • Gilts lag as US data spur global bull-flattening

  • Gradual insurer take over raises issues for pensions, gilt market

  • New issues: TP ICAP, Center Parcs


    Gilts lag as US data spur global bull-flattening

    Gilts underperformed today after more weak US data prints – ADP and ISM Services – bull-steepened the Treasury and Bund curves, but had much less impact on gilts. The spread to 10y Bunds grew by 6bps to 124bps, its widest level since mid-January, as the gilt future rose by just over a point from morning lows. Similarly, while EURIBORs rose by 14-18 ticks in the reds helped by a slight reduction in ECB officials' hawkishness, the rally in red SONIAs was just 1-4 ticks.      


    It’s hard to blame supply for gilts lagging in today's global move, given the decent 2.67 times bid to cover at the DMO’s £3.5bn auction of 0.5% 2029 bonds and the gilt's satisfactory performance on the follow. 


    Gilts 2s/10s bull-steepened to test 13bps following the US data but flattened back to 9.7bps (+0.2) at the close. 10s/30s took back some of the long end's recent flattening and finished at the day's steeps around 34.3bps (+2.8). But asset swaps were little-changed at -9.9bps (+0.2) in 10y and -56.1bps (-0.1) in 30y.


    Finally, inflation came under pressure throughout the day led by the front end of the curve. 1y RPI swaps fell 18bps to 3.96% and 10y RPI dropped 5bps to 3.86% while linker real yields bear-flattened. Longer-dated cash breakevens fell by 2-3bps while the DMO confirmed plans to auction £900m of the IL39 on April 12th as expected.    


    Gradual insurer take over raises issues for pensions, gilt market 

    Pensions remain in focus this week with an interesting FT article by Toby Nangle today (link) flagging up the possibility that the rush to offload liabilities to a handful of specialist pension insurers, via buy-ins or buyouts, has “profound implications for fixed income market structure, government financing, (and) the transmission of monetary policy”. Note that DMO CEO Sir Robert Stheeman also acknowledged the structural shift in de-risking when talking to Total Derivatives (link) after last month’s Budget


    Over time, the move threatens to give a very small number of insurers (just eight firms, according to the article) with highly regulated but very similar business models “immense market power”. The LDI market was pretty concentrated before the Autumn 2022 LDI crisis and subsequent deleveraging and that didn't go well.  


    The papers also cover the post-pandemic fall in overall UK life expectancy, a development that may provide some pension schemes with an “unexpected windfall” along with the rise in yields over the last 18 months.     


    Nangle acknowledges that the speed of the move towards de-risking with pension insurers will likely be capped at around £50bn in transactions a year – versus £2trn in DB pension liabilities - by the difficulty of selling illiquid assets along with capital and operational constraints.   


    Elsewhere, analysts at BNP Paribas look at the near-term market implications of the recent recommendation by the BOE FPC for a minimum 250bps 5-day 30y real yield “liquidity cushion” for LDI funds.


    BNPP warns that The Pension Regulator will need to set out details of the FPC’s recommendation when it releases detailed guidance, expected later this month. But BNPP sees the reduction in uncertainty as supportive for long gilts versus swaps and on the curve, as it explains:


      “A majority of defined benefit pension schemes are now in surplus, implying a pipeline of de-risking that was likely awaiting the FPC (and also the TPR) proposals.


      “We see a risk of a strong herd move to long gilts if there is a sharp rally, with immediate buy-in/buy-out capacity constrained.”


      “With this backdrop and long-end swap spreads close to the 2016 wides, there is value in cash gilts at the current levels, we think. Also, gilt 10s/30s may flatten.”


      “We find 15-25y positive real yields interesting. (However) given the past month’s 50bp rally, we look to enter only after a meaningful cheapening.”


    New issues: TP ICAP, Center Parcs  

    • TP ICAP (BBB-) today priced a £250m 7y 7.875% bond at gilts +465bps. Leads are BofA (B&D), HSBC, Lloyds, JPM and SMBC Nikko.  Books were above £1.3bn.


    • Watery hell Center Parcs is close to pricing £324m long 4y and £324m long 8y BBB-rated secured bonds at gilts +260 and 280bps, respectively. Leads are Barclays (B&D) and HSBC.