Capital markets expansion and central bank decisions shape sterling rates

Market update

Capital markets

• PfP tapped their existing 5.75% 2055 issue, increasing it by £95M, bringing the total outstanding amount to £595M.
• Swaythling Housing Society, an Abri Group subsidiary, has obtained £30M of funding through THFC. The facility has a coupon of 5.73% and has a 12-year tenor as it is due to mature in May 2036.
• Acis Group has agreed to a shelf facility by THFC through the bLEND issuance. The agreement allows Acis to draw up to £20.0M at a future date.
• Motability (A/A1) priced a three-part debt sale, two of which were in euros and one in sterling.
• The sterling tranche saw £500M issued at 27 years, with initial price talk at G+125, tightened 15 bps to G+110. The coupon was set at 5.75%, with the issue pricing below par at 99.282 to yield 5.803%.
• The two euro tranches consisted of EUR1B (GBP equivalent c. £843M) each, with a long five-year maturity and an 11-year maturity.
• The five-year issue priced at MS+105, tightening 20 bps from initial price talk at MS+125. The coupon was set at 4.00%, and therefore, it priced slightly below par at 99.857 to yield 4.033%.
• Similarly, the 11-year issue priced at MS+140, tightening 20 bps from initial price talk at MS+160. The coupon was set at 4.25%, with the issue pricing slightly below par at 99.44 to yield 4.315%.
• All three issues reported c. 2x bid-to-cover ratio, showing a reasonably strong level of demand.

Economic news

• The ECB has been the first of its peers to initiate the rate-cutting cycle, cutting rates by 25 bps. The deposit rate now sits at 3.75%, down from 4.00%, with the refinance rate dropping to 4.25% from 4.50%.
• Whilst this was in line with market expectations, with EU CPI moving in an encouraging direction, the message from the ECB was slightly hawkish — stating that a pre-determined path for interest rates is not set and that there may be large pauses between rate cuts.
• The Federal Reserve kept its target rate unchanged in its June meeting. CPI figures were released prior to the meeting, showing little change at 3.30% down from 3.40%.
• Though inflation eased, it did not slow at the pace that the Fed expected and is still well above the 2.00% target. Inflation projections have been uplifted, with one cut expected in 2025, in contrast to the three cuts forecasted in March.
• The narrative of the Fed is in line with the Bank of England (BoE). Both central banks are waiting for the data to reflect that inflationary pressures have truly eased and are preparing markets for rates staying higher for longer.
• The BoE and the Fed will likely reflect a similar narrative to the ECB once the rate cutting cycle begins — there will be pauses between rate cuts and rates will not ease at the same pace as they were tightened.

Sterling rates markets over the past fortnight

• Rates have decreased by c. 20 bps across the gilt and SONIA swap curves over the past fortnight.
• The easing in rates came on the back of labour market data. While annual growth in pay remains relatively strong, regular earnings (excluding bonuses) remained at 6.00% in February to April, the same as the previous three-month period. Similarly, total earnings (including bonuses) remained at 5.90% in the same period, unchanged from the previous three-month period.
• However, there has been significant easing in private sector regular pay growth, with growth at 5.80% for the three months leading up to April. The last time regular private sector pay growth was recorded at a lower figure was in April to June 2022 at 5.40%.
• The signs of an easing labour market have reversed the surge in rates seen after the higher-than-expected inflation print.
• With a c. 20–30 bps movement during a week, volatility continues to be the norm, with rates being sensitive to market sentiment and data releases.

Indicative pricing