GBP Swaps: Can of worms opening up in linkerland

Can of worms opening up in linkerland

Another zany day in the GBP fixed income/linker market saw yesterday’s 12bps rally in 2y yields on very little, become a 7bps sell-off as gilts bear-flattened. Meanwhile, former Undertones lead-singer Fergal Sharkey did his best to rattle the RPI market with his demands that it be all over now for Thames Water, calling for them to be nationalised.

No statement came today regarding the future of the debt-sodden Thames Water, although it has shown its intent by announcing a new chairman (Adrian Montague) to start work on July 10.  Looking at the problem of debt in the water sector, one veteran inflation trader said today that “I think the first question to answer is what will happen to their bonds?”

“State takeover would typically mean a default of sorts, equity wiped out… debt haircuts. And there is £560m of outstanding debt that would require immediate repayment in those circumstances.”

“Some or all of the derivatives (held by Thames Water)  will be linked to their bonds and most will have bespoke confirmation language. Which means a big can of worms,” he said. For more on the debt and the swaps, see Total Derivatives

But for today, there was nothing untoward in terms of RPI pricing except for a decent flattening and ultra-long underperformance, with the front-end of the RPI swaps curve pushing 5bps higher to 4.25%, while 30y fell 1bp and 50y by 3bps, moves that by modern standards are close to unchanged.  

Moves in nominal gilts today though were more expansive. The 2y closed +7bps at 5.20%, 10y was +5bps at 4.60% and 30y was +4bps at 4.42%. In swap spreads the 2y was -1.5bps at -58.9bps, 10y was +0.3bps at -4.5bps and the 30y was unchanged at -56bps.

The flattening was supported by a speech yesterday from BOE Governor Andrew Bailey who said that inflation “is much stickier” than the market is pricing, though he predicted a lower peak than the market is backing. And even departing dove Silvana Tenreyro sounded more converned about inflation in her valedictory speech today. Meanwhile the UST market staged a big post-data sell-off (10y UST yields are +15bps now), albeit against a backdrop of recent hawkish words from the Fed’s Powell.

New issues: Admiral, RBC

• Admiral has priced a £250m, 8.5%, Jun 2034 sub Tier 2 bond at 8.5% and gilts +410bps via HSBC, Lloyds (B&D) and UBS.  

   

• RBC has priced a self-led £1bn, July 2024, SONIA +48bps bond at par, taking the total of similar short-dated FRNs, mostly from CAD names, to over £5bn this month.