SWAPS: Long End UK Swap Spreads Extend Recovery As Political Noise Slows

Long end UK swap spreads continue to rally from Friday’s year-to-date lows, with public ministerial support for PM Starmer (albeit with questions over how long such support will ultimately last) helping remove some of the acute repricing of UK fiscal & political risk premia that dominated both last week and in early Monday trade.

• A reminder that the presence of a by-election (later this month) and local elections (in May) are seemingly prolonging Starmer’s stay in office at this stage.
• The 10-Year swap spread is already within 1bp of year-to-date highs, while the outright 10s30s gilt curve failed to challenge November highs during the recent gilt sell off (a reminder that the DMO has skewed the WAM of its issuance profile shorter in recent times, which allowed the super long end to outperform in ’26).
• We had previously warned that political and fiscal risk premia could come back to the fore for gilts, although that played out much sooner than we anticipated.
• Note that markets remained orderly during the sell off, with the reforms that came in the wake of the LDI crisis/Truss moment and BoE liquidity provisions removing some of the risks of disorderly market function.
• Still, recent sessions remind us how quickly the situation can change and provide some insight into how the UK long end would react is PM Starmer is replaced by a more left-leaning successor (bear steepening pressure for gilts and underperformance vs. swaps on the assumption that fiscal policy would be looser).
• Late last week Morgan Stanley suggested that “30-Year ASW screens somewhat rich” vs. their regression of fair value, although they did not issue any trade recommendation based on that view.