Banking market liquidity gains traction among housing associations

Indicative pricing

Market update

The sterling bond market

• Over the last week, there has been little change in gilt yields, as the market waits for the interest rate announcement on 11 May from the MPC.
• After the poor inflation figures for March, the markets are currently anticipating another increase in the base rate of 0.25%, bringing it to 4.50%, with a peak in bank base rate of about 5.00%.
• This is slightly more hawkish than consensus expectations from economists, which expect the rate to peak at 4.50%.

Housing association spreads

• Housing association (HA) spreads have slightly tightened.
• Investors continue to favour higher rated HAs, as evidenced by a 50 bps difference in spreads between HAs with higher ratings (A+/A1 or A2) and those with lower ratings (A-/A3). Differences are more pronounced for issuers with a two-notch uplift from the underlying BCA, suggesting investors are focusing on further downside risk on ratings around the BBB+/A- level.

New issues

• There have been no new HA issues in the past fortnight.
• Activity in corporate bonds was also light. Travelodge priced GBP 330M of 5-year (non-call 2-year) notes at a yield of 10.63% on 21 April, equating to a spread of 700 bps for the B3 credit.
• The Debt Management Office (DMO) priced GBP 4.5B of 2045 linkers at a spread of 3.75 bps. The bid-to-cover ratio was high at over 10x, with the issue receiving GBP 46B of bids (including JLMs). This underlines continued strong investor demand for long-dated inflation-linked issuance. By contrast, the bid-to-cover ratio on the recent 2025 gilt auction was 2.56x.

Private placement opportunities

• While the all-in cost of private placements is currently higher than that of the banking market, investors are willing to explore alternative terms in order to achieve their investment objectives.
• This includes short- to medium-term dated options.
• Deferrals may also become more attractive in the current rates environment given the high cost of carry.

Banking market

• The banking market remains a popular choice for liquidity and funding requirements.
• Housing associations are seeking flexibility in their funding and do not want to be tied to high rates for a long period.
• They are instead looking for short- to medium-term liquidity to meet their funding needs, with the intention of refinancing in the future.
• This may be on a floating-rate basis, under the expectation that SONIA will fall in the short-term, or through medium-dated fixed-rate borrowing where borrowers are looking to hedge through the peak in the curve.
• While pricing has increased and debt has become more expensive, this is primarily driven by increases in floating and term swap reference rates. Margins have not changed significantly since last year.
• Credit charges for embedded hedging (FRLs) remains high. However, Chatham is seeing greater competition for standalone hedging under ISDAs (including loan-linked) driving tighter spreads for larger borrowers.

Economic news

• Nationwide housing prices index increased by 0.50% in April month-over-month, beating consensus at -0.40%.
• This is the first increase in house prices since 22 July. Year-over-year, house prices improved from -3.10% in March to -2.70% in April.
• Germany’s year-over-year CPI slowed to 7.20% in April from 7.40% in March, beating consensus at 7.30%.
• Germany retail sales declined in April by -2.40%. This was unexpected as markets anticipated an increase of 0.40%.