UK Bond Market 2010
IFR’s UK Bond Market Roundtable, held in London on September 8, found participants in pensive but broadly optimistic mood. Sterling bond issuance has been slow all year, hamstrung by a basis swap that stubbornly refuses to budge, making it uneconomic for non-UK issuers. The same high swap spreads have made the US dollar market compelling for those UK issuers that have ventured into the market. For top UK names, sterling funding has been anything between 25bp and 45bp back of dollars this year.
Those conditions are showing signs of reversing slowly, but the advice to sterling credit market watchers is not to hold out for a rapid-fire upsurge in sterling credit issuance in the immediate term. The UK macro picture is far from clear for a start. The unveiling of the coalition government’s public sector spending review is fast approaching and the likelihood of strident opposition to any spending cuts is likely to lend itself to a recalibration of return expectations with the potential for price volatility in Gilts.
Political instability could yet spoil the party. The Gilt market has seen very high levels of foreign inflows, accounting for up to 30% of the market this year. This had some roundtable participants bemused. Even if a lot of central bank buying of sterling is strategic and as such is yield insensitive, the fact that UK inflation remains stubbornly above Bank of England targets makes 10-year yields at sub-3% look derisory.
In terms of how participants view prospects for sterling bond issuance, the discussion picked up on a range of themes. The DMO’s successful syndicated Gilts programme could well offer supra/sovereign borrowers good opportunistic funding, although not necessarily in big size. And with sterling yields so tight, investors are on the hunt for return. The sterling market has seen ultra long-dated and corporate hybrid paper this year, and issues have been well subscribed.
Alternatively, debut issuers could offer up some supply. Certainly, the Treasury would like to see a more disintermediated funding market in the UK, but IFR’s roundtable participants were unconvinced that SMEs, for example, would pass muster with institutional bond investors, given the latter’s liquidity and pricing requirements. As a broad theme, M&A was thrown out as a potential opportunity for sterling bond supply, as were emerging market issuers and long-dated non-recourse infrastructure plays.
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