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5-year swap spreads widen (but correction may not be imminent): (1/2)

GILTS
  • Just as in Europe there are divergences between moves in gilts and moves in swaps (particularly at the short-end).
  • Looking at the 5-year point, since the Budget on October 27, 5-year UK swaps have moved from around 1.20% to 1.28%, roughly 8bp higher. The 0.375% Oct-26 gilt yield has moved from 0.80% to 0.71%, roughly 9bp lower.
  • This means that the swap spread has widened from 40bp to 57bp over the past month or so, a 17bp difference.
  • The widening of the swap spread has coincided with the larger-than-expected reduction in gilt supply announced in the DMO remit following Budget.
  • Liquidity in gilts really is quite constrained at present, with the Bank of England the main buyer in town.
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