Sterling issuance market stagnant as rates soar once again

Indicative pricing

Market update

The sterling bond market

• The release of April CPI figures drove further sell-offs in the sterling bond market, driving yields to levels not seen since the mini-budget announcement.
• Headline CPI came in at 8.70%, down from the March figure but exceeding the Bank of England's (BoE) forecast of 8.40%. More concerning was the core CPI print, which rose to 6.80% from 6.20%.
• Swaps are now pricing in a higher peak bank rate of 5.50%. As rates seem to remain elevated as we head into 2024, the market may doubt the BoE's capacity to manage inflation. This would mean a further 1.00% of hikes from the BoE, adding to the 12 so far in this tightening cycle.
• Gilt yields rose by c. 30 basis points on the week with the long gilt (30 years), now trading at c 4.65%. While this remains below the 5.00% peak from last September, it appears to have broken through the 4.25% ceiling that has offered resistance since the beginning of the year.

Housing association spreads

• Housing associations (HA) spreads did not move materially over the past fortnight.
• Spreads tightened by two basis points for tier 1 issuers, 4 basis points for tier 2 and 1 basis point for tier 3.
• The levels are comparable to spreads seen early last year, although tier 3 issuers remain around 15 basis points wider.
• We have not seen any further spread compression despite higher benchmark rates.

New issues

• There have been no new own-name housing association issuance in the past fortnight.
• GB Social Housing, an aggregator lender, carried out a £5.0M tap into their 2038 bond.
  • Pricing has not been disclosed, but on the date of issuance, the bonds were bid at c. 150 basis points over the gilt in the secondary market for an all-in yield of 5.95%.

Trends in the broader sterling market

• Given the slowdown in new issuance, we thought it is useful to reflect on issuance volumes in sterling more generally as this will influence investor appetite for sector credits.
• In the last year, the issuance of GBP corporate bonds has decreased significantly.
• Year-to-date, only £3.75B has been issued compared to £7.24B the previous year.
• Many issuers may have locked into long-term debt at lower rates in previous years and have the liquidity headroom to wait for rates to fall.
• Once circumstances improve or when funding requirements materialise, this could result in a rush to new issuance.
• The market's inactivity has resulted in excess demand from investors, who have excess liquidity and are looking for strong credit investment opportunities. However, issuers may still need to think carefully about their strategy for approaching the market so they do not get lost in the crowd.

Private placement opportunities

• Private placement (PP) investors continue to be short on stock and are willing to lend more.
• This presents a compelling opportunity for housing associations to explore top-ups on existing transactions and potentially negotiate favourable terms.

Banking market

• Markets have been optimistic in recent weeks, with SONIA falling and borrowers considering staying on a floating-rate-basis until conditions improve and rates fall.
• Recent economic releases have changed this expectation and changed market sentiment. We may not see the expected fall in SONIA in the short-term as hoped for and it could be elevated for longer.
• Housing associations may benefit from hedging through the peak of the curve, and lock into rates that are suitable for their business plan.

Economic news

• U.K. CPI continues to show more persistence than policymakers had expected, with the headline rate at 8.70% versus consensus at 8.20%. Core CPI was at 6.80%, above consensus at 6.20%.

• The surge in goods and services we saw last year is anticipated to drop out from the CPI basket calculation. However, it is noteworthy that core CPI is currently peaking and is at its highest level seen in the past 10 years.

• Germany's GDP fell for the second consecutive quarter, entering the country into a technical recession. GDP fell by 0.50% in the fourth quarter of 2022, and then by 0.30% in the first quarter of 2023, quarter-over-quarter. This was below consensus at 0.00%, and the economy is expected to have weak growth in the coming quarters.
• Investors' primary concerns continue to center on the U.S. debt ceiling.
• Technically, the $31.4T debt ceiling was reached on 19 January 2023, and since then, the U.S. Treasury has been taking "extraordinary" measures to prevent breaching the limit and missing payments.
• While there is optimism in the market and assurances that the Treasury won't go into default on its debt obligations, this optimism appears to have suffered over the past week as the deadline draws near.
• Despite a U.S. government default being unprecedented, it is estimated that these measures will be exhausted as soon as 1 June.