GBP Swaps: Are utility linkers coming home? 10y gilts gain

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It was a perkier day for nominal gilts today, but gilts nonetheless lagged on the week. And a utility issuer says linkers might just be back!

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  • 10y gilts gain

  • Are utility linkers finally coming home? 

  • NatWest: Syndi prospects the focus in rare dry week

  • New issues: BMW, Inchcape


10y gilts gain

It was a perkier day for nominal gilts but spreads to 10y Bunds still tested fresh wides of almost 195bps despite a shortened week of modest gilt sales and little in the way of first division UK data.


At the 4:15pm close today the SONIA strip rallied 2-5 ticks in the whites rising to 9 ticks in the greens, 10y gilt yields dropped 8bps versus -5bps in both 2y and 30y as 10y gilts outperformed the rest of the curve. A positive performance but one that still lagged Bunds and USTs where 10y yields (for example) were about -10bps at the time of the London close. Spreads to Bunds never caught up with yesterday's euro rally and the 10y finished at 190bps versus 179bps on Friday.  In swap spreads the 5y was +0.7bps at 21.1bps, 10y was +2.3bps at -10.8bps and 30y was -0.4bps at -59bps.   


Volumes were decent today with the gilt future just about topping 215K in a market that was catching up with positioning and events after the long weekend. The main driver today was the US debt ceiling agreement in Washington that could see Congress rubber-stamp the government spending package before the cliff-edge is reached on June 5.


Are utility linkers finally coming home?

Over in linkerland fingers are crossed, teeth are clenched and lips are being chewed as linker GEMMs nervously await tomorrow morning’s release of the DMO’s Jul-Sep issuance plan, and the revelation of the fate of the mooted July linker syndication (possibly a tap of the IL45).


For more on that see NatWest below. But there are other things stirring in the world of CPI/RPI to get inflation traders’ juices flowing. On Friday (see GBP Swaps: Tentative re-steepening; Corporate linkers) South East Power Networks and London Power Networks (two units of UK Power Networks) sold between them £100m of 2.562% CPI-linked 2043 bonds.


Talking to Total Derivatives today, Andrew Kluth, Head of Treasury at UK Power Networks, said that this first linker issue by his company since 2015 (it has sold four benchmark nominal GBP bonds in the intervening year), might just be a sign of an inflation-linked issuance revival.


He said that “the answer (to the question, why have you come back to linkers after eight years?) is that this is a very competitively priced inflation-linked deal compared to the secondary nominal market.”


“In the past linkers have traded at a premium (i.e. cheap) to nominals which is strange when you think the buyers specifically are looking for inflation-linked assets,” he said. The UK corporate linker market was a vibrant place, popular among (but not exclusive to) utilities, by its 2006, 2007 peak any given week would see multiple RPI-linked deals. But since the credit crunch it has become tumbleweed territory.


This though may just change, said Kluth today. “Fifteen years or so ago people wanted 25bps premiums to nominals (to buy linkers) but over the last decade or so they have reduced that premium to affordable (for the issuer) levels. For issuers like us that is good news because swapping nominals to inflation causes us accounting issues that we don’t particularly want.”


In summary, Kluth said that “the inflation market has definitely become more attractive (for issuers) than it once was. In the case of this deal we had a lot of people wanting to bid for it and every single bank that quoted was cheaper than they were ten years ago.”


He added that UK Power Networks is open to the idea of returning to the linker market relatively soon (certainly in less than eight years' time). This deal was sold to ‘one sensible investor’ and won’t be swapped out of CPI.


And finally, going back to inflation-linked gilts and swaps, breakevens kept their cards close to their chest and ranged from unchanged to -2bps on the day despite a $3 slide in Brent futures. RPI swaps were in an even tighter range of unchanged to -1bp and real yields, clearly, roughly matched the move in nominals.


NatWest: Syndi decision is the focus in rare dry week

Having really gone over-the-top so far this year, the good folk of the DMO are on the wagon this week, the first week of FY 2023/4 which won’t see them turning on the issuance taps at all (although the BOE will be selling gilts in their absence on Thursday).


Strategists at NatWest note today though that while inactive in terms of supply, the DMO may yet have a significant market impact this week, most possibly in the linker market after its publication of its Q2 supply calendar at 7:30am tomorrow morning.


NatWest said that “we will be most closely watching any announcement around the timing of the linker syndication. The minutes from the DMO’s quarterly meeting with GEMMs and investors highlighted some concerns around front-loading linker supply against a backdrop of little demand. Those concerns are only likely to have increased after this week.”


“By addressing these concerns in the minutes, the DMO did give themselves some optionality to delay the linker syndication until later in the year. However, our base case remains that the DMO will go ahead as planned. Choosing to delay may come as an upside surprise to the market, though, and is not out of the question.”


New issues: BMW, Inchcape

  • BMW International Investment BV has priced a £350m 3-year, bond at gilts +110bps via HSBC (B&D) and NatWest.


  • Inchcape plans a Senior 5y bond via BNPP, MUFG, NatWest and Santander once the used car seller completes investor roadshows.