Asian Development Bank injected life into the sterling public sector market with a £350m long two-year on Thursday, though the changeable market is still a long way from its highs, with the £335m-plus books failing to cover the final size.
Leads HSBC, NatWest Markets and TD Securities priced the bond at 64bp over the 2.75% September 2024 Gilt, 1bp in from guidance and around 10bp back of secondaries, according to a lead. He said that spread did not constitute a new issue concession, citing dislocation between secondary prices and clearing levels in primary. The deal emerged after a successful transaction from DNB Bank the previous day that showed the market was in good shape.
Sterling offered ADB low single-digit arbitrage versus US dollar funding, the lead said, adding that the short tenor was where the deeper pockets of demand lay – central banks were the main accounts found there.
Commenting on timing, the lead said: “The view, in the end, was that the combination of a back-up in yields plus an optically generous level versus secondary marks would work.”
ADB also exploited the gap between swaps and Gilt spreads following the Bank of England’s announcement last week, according to a banker away from the deals.
“The swap market is very volatile,” he said, “but SSA sterling [paper] trades to Gilts and moves a lot slower than dollars and euros and other currencies versus the swap market. Last week’s announcement by the Bank of England that it’s not going to sell anything shorter than three years – even though that was expected – moved swap spreads meaningfully wider, which created an opportunity. Hats off to Asian Development Bank to be the first to monetise that.
“What’s good about the sterling market is you have a very short execution window. You can be in and out in the morning. You can be done before the US gets in. They’ve done this [ADB] trade even on CPI day, and inflation data are the key numbers … but you have to be aware that tomorrow could be a bad day.”
Limited buyers, limited sellers
This was an effective window for ADB, but the sterling market “is still not back to the good old days”, the lead said. “We’ve passed the major hurdle of the first round of central bank moves. … It is encouraging people to come back. But, frankly, swaps are still far too wide for anything to work properly.
“The core [sterling] investor base away from central banks is UK bank treasuries. [The ADB deal] is the equivalent of Sonia minus 17bp, so there’s no real bank treasury swapping interest on that one. Until that dynamic changes, I don’t think we’ll see the same level [of participation].”
And while some sterling investors are clearly interested, there are a limited number of issuers looking to do this short-end funding, the banker away said. Most sellers got that funding done earlier in the year.
The constricted sterling bid and well-funded issuers were reflected in the sparse July supply. The pair of sterling SSA deals that did print got mixed receptions. International Finance Facility for Immunisation had a predictably easy time of it thanks to its unique vaccine exposure, printing a £250m 2.75% June 2025 bond. Inter-American Development Bank faced a stiffer market when it came with a £300m 2.375% August 2029 deal less than a week later, pricing flat to guidance at 56bp over the 0.5% January 2029 Gilt after the £200m-plus books failed to cover the size.
Wednesday’s sterling deal is ADB’s second issue this week. It printed a A$450m (US$318m) tap of its 3.7% June 2025 Kangaroo gender bond the same day as the sterling deal. Leads ANZ, RBC and TD Securities priced it at 23bp over asset swaps, equivalent to ACGB plus 67.95bp.