GBP Swaps: Gilts, SONIAs slump. Syndi steepeners? PRT on course for record

Happy pensioners 11 Oct 2021
Gilts and SONIAs lost further ground today, taking the 10y spread to Bunds back over 200bps. Banks suggest re-syndi steepeners.

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  • Gilts lead global slide; Pre-syndi 30s/50s steepeners?

  • Record pension risk transfers straining the market’s capacity: LCP  

  • New issues: IFC, ADB


Gilts lead global slide; Pre-syndi 30s/50s steepeners?

Long gilts are leading the slide in global fixed income this afternoon with the gilt future more than a point lower albeit in summery volume of 125K while 30y yields are +9bps at the time of writing, putting the long end within spitting distance of 5% for the first time since the LDI crisis of late 2022. Today's move has built on an across-the-curve 35bps surge in yields over the last week and 10y gilts once again yield more than 200bps over Bunds.


In contrast to the volatility in the outright, most the curve has been relatively stable over the last few sessions with 2s/10s at -51.2bps (+2.8) and 10s/30s at 18.6bps (-0.4) today. However, next month sees the expected syndication of the 4% 2063. 30s/50s steepened a touch yesterday and again today, to around -47.9bps (+0.5), and RBC suggests entering 30s/50s steepeners ahead of the supply, as it explains below:


  • “(Recent steepening) appears to be driven by the market setting-up ahead of the anticipated conventional gilt syndication in 3 weeks’ time…4% 63s was the worst performing bond in longs yesterday morning, when the steepening was most notable…Our analysis suggests we could see another 5-6bps of steepening over the next 2-3 weeks.


  • “The 30s/50s curve currently trades around 6bps flat relative to the level of implied volatility…The performance of the ultra curve has dislocated with the level of implied vol over the past 2 weeks, with the curve flattening despite implied vol having continued to moderate. We think an explanation for this phenomenon has been the lack of 20y+ supply from the DMO over recent weeks


  • “30s/50s trades around 5bps flat relative to 10s/30s…which looks particularly mis-priced ahead of the syndication…With over 3 hikes priced back into the money market curve over recent sessions, we like structures with a bullish bias such as a 30s/50s steepener into the ‘flash’ PMIs next week


  • “Ahead of the launch of the 4% 63s via syndication on May 16, we can see that in the 3-4 weeks ahead of the event, the ultra curve steepened around 6bps


  • “The 4% 63s are already trading cheap on RV…We do not anticipate much more of a concession on micro-RV…and believe that the market will deliver a concession primarily via the curve.”


Shorter in, SONIAs are down by another 9-13 ticks in the reds and the greens, and 2-7 ticks lower in the whites with volume heaviest at 70K in the Dec23 contract. The implied peak for the BOE’s benchmark rate has edged up and out to 6.12% for the Mar24 meeting, suggesting around 86bps of further tightening by then. Interestingly, the 30-35bps rise in 2024 SONIA forwards over the last week has outstripped the 26bps rise RPI 1y inflation swaps over the same period, suggesting tighter real interest rates. RPI 1y is around 4.04% (+1bps) at the close. 


Cable basis today repeated its recent pattern of being better offered at first and then coming back later in the session against a background of more cross-market sterling issuance, this time in 3y and 5y from the IFC and ADB respectively. 3y cable traded a few times down to -17.5bps while 5y was better offered to trade at -20.875bps before recovering.


Finally, gilt asset swaps ended little-changed at 34.3bps (+0.3) in 5y and -59.6bps (+0.7) in 30y.   



Record pension risk transfers straining the market’s capacity: LCP  

Pension risk transfer buy-ins/outs hit a record £20.2bn in the first half of 2023 according to consultants at LCP today, around 20% higher than the previous first half record of £17.6bn in 2019, and almost double the pace seen in H1 2022.


The surge puts the market on track to break the full year record of £43.8bn reached in 2019 although LCP says that final volumes will depend on “whether a number of (unspecified) big deals complete this year”.


Indeed, LCP highlights that the market has been dominated by six large £1bn+ transactions in 2023, alongside a strong flow of smaller and mid-sized deals. It expects the skew to bigger trades to continue in the second half of the year, with “improved funding levels and attractive non-pensioner pricing” allowing more schemes to move straight to full insurance.


Across insurers PIC wrote the most business in H1 2023 with £6.5bn and a 32% market share. L&G was second with £4.9bn and 24%. Avia was third with £2.4bn, Standard Life fourth with £2.3bn and Rothesay was fifth with £1.9bn, although the latter excludes the £0.4bn deal announced earlier this week (see Total Derivatives GBP Swaps).   


Still, Imogen Cothay, Partner at LCP, said the rise in business was creating “capacity crunches across the market”, with insurers forced to be selective. Ruth Ward, Principal at LCP, agreed: “In the near term, the spike in demand for buy-ins/outs, driven by rapid funding improvements for many schemes, is testing insurer capacities."


New issues: IFC, ADB

  • IFC priced a £100m tap of its 3y bond 5.5% due Jul 2026 at gilts +53bps. Leads are BMO (B&D) and Citi.


  • ADB priced a £300m long 5y bond 5.125% due Oct 2028 at gilts +47bps. Leads are Barclays (B&D), HSBC and NatWest.