GBP Swaps: Bear-flattening as market braces; 5y breaks 5%; PIC pipe

Bear-flattening as market braces for big week

The last time 2y gilt yields were at 5% Dizzee Rascal was top of the charts with Dance Wiv Me, Gordon Brown was being considered a bad PM (the bar has since been lowered) and the date was July 2008. 

Today another aggressive front-end led selloff in GBP fixed income saw the 2y gilt yield end the day +12bps at 5.04%, though in the long end the 30y gilt yield ended just 2bps higher at 4.53%, with increasingly hawkish sentiments regarding the path of MPC rate hikes driving the flattening.

UK news headlines today were focused on the rise in average 2y mortgage rates above 6% but 5y swaps broke 5% today which signals pressure on the 5y fixes, and SONIAs fell by as much as 19 ticks in the reds, albeit in volumes of below 30K for the late-2024 contracts. SONIA for this week's MPC meeting is priced for a 4.81% Bank Rate implying the outside chance of a 50bps hike. 

BofA strategists today warned that it expects the MPC to come up with more hawkish messaging at its meeting on Thursday, adding that "we expect three more 25bp hikes from the BoE (next week, August and September) to 5.25% terminal. We expect the BoE to keep hiking until core inflation drops, which we expect from August (published in September). We see upside risks to that call."

Before the MPC, on Wednesday, comes what could be pivotal CPI/RPI data, and with RPI expected to rise by 11.2% yoy in May versus 11.4% in April according to the Bloomberg survey, inflation traders are on red alert for a busy midweek. Core CPI is seen unchanged at 6.8% yoy. 

RPI swaps ended the day -2bps in the front end and -1bp in the long end, while real yields tracked nominals with a double-digit rise back towards 1% in 5y. One inflation trader at a leading GEMM said this afternoon that "it was super quiet, there's not much trading at all," noting that beyond those comments he had nothing to add. TZT gas futures rose from session lows but finished just in the red.

The moves in nominal gilts were quite striking, even in these volatile times, with 5y gilt yields closing +11bps, while the 10y was +8bps at 4.49% and the 30y was  +2bps at 4.54% as it outperformed at the prospect of the MPC turning more hawkish.

Asset swap spreads were mixed today with the 2y last +1bp at 54bps, 10y was -0.5bps at -9.6bps and the 30y was +1.5bps at -55.7bps. 

And in supply, the BOE's £770m APF sale of 2030-2042 maturity gilts attracted a decent bid/cover of 2.28 times with the 4.25% 2032 gilt the most bid for (£662m) and purchased (£337m). It sold off 3.5bps after the operation and into the close, ending the day 8.5bps higher in yield versus Friday. 

At the close today the gilt future had traded in size of just 132K in what was something of a phoney battle ahead of what could be quite an intense war come Wednesday and Thursday. 

PIC has £50bn pension pipeline

Pension Insurance Corporation today reported a ‘strong’ start to 2023 with £6.2bn in new business during the first quarter taking PIC’s portfolio to £47bn (link). That helped the insurer to pay its first dividend, against the backdrop of a fall in its Solvency Ratio to 193% in Q1 2023 from 225% at the end of 2022.

Ahead, as 10y yields approach the 4.5% levels tested during the Autumn 2022 LDI crisis (20y to 30y yields are still 40-50bps below the levels hit during the Truss interregnum), PIC said that it has a new business pipeline of ‘more than £50bn’.   

In comparison, Rothesay last month reported first quarter new business of £1.6bn, a book of  ‘advanced’ business of £10bn and a total new business pipeline of ‘over £40bn’. It estimated a Solvency Ratio of 243% in Q1 2023.

New issues: United Utilities, Skipton 

• United Utilities Water Finance today priced a £350m, 5.75% June 2036 Sustainability bond at gilts +120bps via Deutsche, HSBC, JPM (B&D) and RBC. 

   

• Skipton Building Society today priced a £500m, SONIA +52bps Covered FRN via HSBC, Lloyds (B&D), MS, TD and UBS.