GBP Swaps: SONIA back from brink; Rothesay; Happy hedges

Hedge trimming
A week that is shaping up to be an intense 4-day rollercoaster ride started with a dovish jolt. Rothesay has a big pipeline and hedges still pay.

Start a free trial to read this article

Join today to access all  Total Derivatives content and breaking news. Already a subscriber? Please Log In to continue reading.

Or contact our Sales Team to discuss subscription options.

Get in Touch
Blurred image of Total Derivatives article content


  • SONIA back from brink as rollercoaster gets moving

  • Rothesay de-risks Repsol scheme, has £40bn pipeline

  • UK banks' structural hedges continue to pay

  • New issues: YBS


    SONIA back from brink as rollercoaster gets moving

    As one seasoned gilt market participant said this afternoon, “it’s going to be a rollercoaster of a week,” with two central banks crammed into the remaining three days and with both bulls and bears very capable of making strong-sounding arguments for their views on fixed income.


    Today was a game of two halves. First up the market adjusted bearishly in line with the US moves while gilts enjoyed their Bank Holiday, then got a jolt this afternoon when US job openings data showed a sharp drop to 9.59m in March from 9.97m in February, a surprise drop that saw the front of the USD fixed income curve almost immediately price out back-to-back 25bps Fed hikes with red SOFRs up 22 ticks.


    Here, said the above source, it also made an impact. “The strong labour data (in the US) has long been a puzzle… is it to do with skill mismatches in the labour market? Is there a problem with the data? Whatever has been going on though might just be showing signs of cracking now.”


    He said that prior to the data (at 3pm London time) the GBP fixed income had been flatlining after an early repricing that saw Sep23 SONIA futures imply a 5% rate.  “It has knocked on the door of 5% a few times but not got there, so that could have been significant. But the US data has pulled it back to 4.82% and who’s to say if it will get back to 5% this cycle?”


    And, added the source, “gilts have been weak versus USTs for a while now because of (UK) CPI prints, so if they ever turn around there could be a decent move.” Similarly, after trading a little above 85bps in early February, 10y gilt/Bund spread hit 140bps today (currently 141bps) for the first time in years, gravity, the source said, may soon come calling.


    Meanwhile, high volumes for a first session of the week reflected the reality of a market squeezing five sessions into four, and with the central bank caravan arriving in town tomorrow led by the FOMC, “it’s going to be a rollercoaster,” for the remainder of the week, cautioned the above market participant.


    Bull-steepening was clearly the order of the day. Aside from the big volte-face in SONIA, the benchmark 2y gilt traded at 3.88% in the morning, 3.83% just before the US data, and closed at 3.72%, -5bps on the day. The 10y also closed -5bps at 3.66% and 30y was -3bps at 4.05%. In ASWs the 5y was -0.7bps at 29bps, 10y was +0.5bps at -9bps and the 30y was -0.7bps at -55.4bps. Over in RPI, cash breakevens finished 3-6bps tighter led by the front end.



    Rothesay de-risks Repsol scheme, has £40bn pipeline

    Rothesay today announced a pocket-sized, £160m buy-in covering 447 members of the Repsol Sinopec Pension and Life Scheme.


    The insurer said the transaction was completed under an “accelerated” process that allowed the Trustee to act quickly amid market conditions that offered “favourable pricing” in an “increasingly busy” market.


    Indeed, the pension insurer’s first quarter trading update, also released today, makes the current strength of demand in the buy-in/buyout market clear:


      “Since the start of 2023, Rothesay has completed de-risking transactions with four pension schemes, resulting in new business premiums of c.£1.6bn. Rothesay is currently in advanced stages on over c.£10bn of further new business.


      “A buoyant bulk annuity market continues to create significant new business opportunities, with Rothesay's own new business pipeline currently over £40bn.


      “Our significant surplus capital means that Rothesay is well-placed for further future growth opportunities resulting from the positive conditions in the pension risk transfer market.”


    Given concerns about credit and commercial real estate, Rothesay said that it has “minimal” exposure to BBB-rated bonds while its commercial real estate lending exposure is “primarily” through senior debt financing of “landmark property assets with “highly-rated tenants and owners”, and “low” LTV ratios of around 50%.



    UK banks' structural hedges continue to pay

    While (mis) management of interest rate risk has been partly blamed for the demise of US banks SVB and First Republic, UK names continue to reap the benefits of higher rates through their sticky current accounts, structural hedges and associated receive fixed swaps.


    Barclays last week said that although its structural hedge notional shrank by £3bn in Q1 2023 to £260bn reflecting “expected deposit migration mainly in corporate”, the size of the hedge was still £22bn (9%) bigger than a year earlier. And with GBP 5y swap rates rising to 3.96% at the end of the first quarter, gross income from the hedge jumped to £773m in Q123 from £378m in Q122.


    Still, the duration of Barclays’ structural hedge shortened to around 2.5 years from 3 years, while Barclays said that it was maintaining “prudent buffers” for “further deposit migration”.      


    Elsewhere, NatWest didn’t update on the size of its structural hedge as part of its Q123 results last week. Still, the hedge had grown to £230bn at the end of Q422 from £206bn a year earlier, producing total income of £2.1bn in 2022.   


    New issues: YBS

    • Yorkshire Building Society has priced a £350m, 6.375% 5.5y NC4.5 SNP at gilts +265bps via Barclays, HSBC, NatWest (B&D) and UBS.