Barclays takes Gilt hit thanks to BoE intervention

IFR 2453 - 01 Oct 2022 - 07 Oct 2022
5 min read
Alex Chambers, Christopher Whittall

Barclays sustained tens of millions of pounds in losses on its UK government bond trading desk on Wednesday, according to sources, after the Bank of England's extraordinary intervention in Gilt markets blindsided traders across the market and hugely complicated the key role Barclays was playing in smoothing the UK DMO's sale of debt that day.

The DMO's £4.5bn syndicated tap of its 30-year green Gilt was caught in the crossfire of the BoE's shock intervention to buy long-dated bonds on Wednesday morning, causing the price of the outstanding bond to leap from around 45% of face value at the start of the day to more than 52% when the deal was priced.

The dramatic price swings sparked speculation among rates desks about the impact on Barclays, which was duration manager on the trade. The duration manager handles orders for the debt sale that are made on "switch", when investors swap old bonds for the new one rather than stumping up cash. Syndicate managers involved in the green Gilt tap said the majority of the deal was conducted this way.

The sharp move in bond prices made Barclays' job all the harder and sources said its Gilts trading losses following the BoE announcement ran into the tens of millions of pounds.

A spokesperson for Barclays declined to comment on Friday.

On Saturday, sources familiar with the situation said that in fact Barclays had not lost money from its role as duration manager on the deal.

"If I was the duration manager on this, I would have been swearing or crying. Nine out of 10 times, you would be going in short into a syndication," said one senior UK banker. Many other bankers shared this view, while noting it was difficult to calculate the extent of losses precisely without direct knowledge of Barclays' hedging strategy.

Gilt markets had one of their most volatile days in history on Wednesday. The yield on the 30-year note peaked at more than 5.1% prior to the BoE's announcement, before sinking below 4% later in the day following a furious market rally. The whipsawing moves left traders across the market gasping for breath.

Average daily trading volumes in Gilts more than doubled from the previous week to £45bn, according to market-wide data from bond trading platform MarketAxess, as investors scrambled to adjust positions.

The BoE's unexpected intervention also caused havoc for bankers trying to underwrite the DMO's tap of its 2053 green bond – and particularly for Barclays acting as duration manager.

Not normal

While in normal times duration managers are often positioned short going into a syndication to hedge potential orders on switch, liquidity in the Gilt market has been terrible lately with bid-ask spreads widening significantly amid the volatility. That may have prompted Barclays to take a more cautious approach to keep risk as low as possible around the syndication, traders say, potentially limiting the scale of its losses.

"Being long or short, you're running a risk that you can't cover your short at a decent price [because liquidity has been so poor]. Even if you're right on the direction," said one trader.

Duration managers will typically sell the bond being switched or futures to hedge the spread between the new issue and the switch. Traders note that the bank managing the process will often be able to offset some of the orders on switch with other investors that are using the additional liquidity provided by the syndication as a way to buy the bonds at a better price than they might otherwise find in the market. That can help the duration manager keep its net risk closer to neutral.

One senior syndicate banker said he'd be surprised if Barclays was running a large short position heading into the auction. "They would be hedged with a benchmark," he said.

Another said he thought the duration management exercise seemed to go smoothly.

"It's not the sort of role where the prestige of getting it right outweighs the downside of getting it wrong. No one wants to lose money. You're not going to say 'well we lost millions today but we were duration manager'. They did a better job than very many other firms would have done and it was brave of them to stick their hand up to pitch to be duration manager," he said.

Refiled story: Adds paragraph six citing sources familiar with the situation