Sterling rates markets show volatility while February PMI data indicates economic growth

Market update

Private placements

• Chatham is delighted to announce that it has arranged a £120M private placement for a housing association (HA).
• The transaction consisted of three tranches at £40.0M each, at 15-year and two 22-year tenors including deferred drawdowns.
• Notes were placed with an existing investor, allowing for swift execution and delivering value for money given the favourable rates backdrop.

Capital markets — Sterling issuance

• Heathrow has completed a £350M eight-year sustainability linked bond at G+190. Initial price talk was at G+210, with guidance at G+195. Books were reported above £1.1B, at 3.14x coverage.
• Peabody Trust has established its Medium Term Note programme in accordance with its sustainable finance framework. Peabody can raise up to £1B under the programme and will allow for flexible issuance of capital markets debt.
• Anglian Water (A3/A-/A-) priced a £375M 19.25-year senior secured issue at G+118 to yield 5.78%. This represented a c. 18 bps NIP to their 6.00% 2039 issue. It tightened significantly from initial price talk at G+135. Books were reported at £1.45B, implying a 3.8x bid-to-cover ratio. The issue was structured as a sustainability-linked transaction in line with their Sustainable Finance Framework. Interestingly, Anglian also included a termsheet for a CPI-H linked transaction in its roadshow materials but has not come to market on this series. Instead, it appears that the fixed-rate issue was upsized to take account of the additional funding.
• These deals suggest that issuance dynamics in Sterling remain strong, particularly for well-known names or issuers with a strong credit profile. Bid-to-cover coverage levels are particularly encouraging, suggesting strong investor engagement, supporting good secondary levels post issue and opportunity for other borrowers to enter the market and capitalise on demand overhangs.

Sterling rates markets over the past fortnight

• Markets are expected to demonstrate some volatility throughout the first three weeks of March given the Spring Budget announcement, together with labour market data, CPI, and the Bank of England (BoE) rate decision.
• Timing will likely play an important role in de-risking transactions and HAs transacting over this period will benefit from a clear understanding of their maximum levels for fundraising and fixing, as well as the ability to vary these as market conditions evolve.
• Gilt yields have not seen large movement compared to a fortnight ago. The long end of the curve at 25-year+ have seen gilt yields come down c. six-to-eight bps. The short end of the curve has also seen gilt yields decrease.
• However, the SONIA swap curve has seen rates come down by c. seven-to-10 bps from 15-year onwards over the past fortnight and has taken on a flatter shape from 10-year onwards.

Economic news

• The Spring Budget will be announced on 6 March. With general elections on the horizon, Chancellor Jeremy Hunt has an array of objectives to balance.
• Inflation remains above the 2.00% target and continues to squeeze household incomes. Rising interest rates and an increased tax burden has created a challenging economic climate. With monetary policy remaining tight, markets anticipate the Chancellor will loosen fiscal policy in the upcoming budget to ease the financial strain on households.
• The upcoming budget is expected to address the U.K.'s housing crisis in some manner. While the government has already increased the Affordable Homes Guarantee Scheme (AHGS) by £3B and expanded its uses, further measures are anticipated to ease the burden on first-time buyers facing a tougher market due to rising interest rates. This could involve mortgage products like 99.00% mortgages or tax breaks like stamp duty reduction. However, such measures do not address the root cause of affordability, the lack of housing supply.
• February's flash PMI data offers a more optimistic outlook for the U.K. economy, showing signs of growth despite recent GDP figures suggesting a "technical" recession. This aligns with expectations of a shallow and short-lived downturn, with a potential for a quick recovery.
  • Flash Composite PMI came in at 53.3 (January: 52.9). This represents a nine-month high.
  • Flash Services PMI remained unchanged from the January figures at 54.3, and manufacturing PMI came in at a three-month high at 47.1 (January: 47.0).
• This would mark the fourth month of increasing business activity in the private sector. However, it is noted that inflationary pressures remain elevated, with input inflation at its highest level since August 2023. This was mainly contributed to rising salaries in the service sector.

New Consumer Standards

• The Regulator of Social Housing has released their new consumer standards, applicable from 1 April 2024.
• It is applicable to all social landlords and is graded from C1 (top grade) to C4. It will be graded alongside the existing governance and viability grades.
• The four standards are:
  • The Safety and Quality Standard
  • The Transparency, Influence, and Accountability Standard
  • The Neighbourhood and Community Standard
  • The Tenancy Standard
• The standards allow the RSH to investigate and take action against any breaches.

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