GILTS: /SWAPS: Downside Risks To Swap Spreads Remain

Medium-term risks remain evident, even after long end UK swap spreads have recovered for their late March lows.

• Downside risks to spreads stem from more expansionary fiscal policy, the supply backdrop and the future of BoE asset sales.
• In short, one or more of the following inputs is likely required to promote a break of late February highs in long end spreads:
• Lower energy prices, presumably on the back of a more durable U.S.-Iran ceasefire agreement. This would help remove some of the inflation risk premium embedded in gilts at present, promoting outperformance of gilts against swaps.
• Mayor of Manchester Burnham not becoming PM/losing the June 18 Makerfield by-election/adopting a more conciliatory fiscal stance if he does win a Labour leadership contest.
• A reduction in BoE APF sales (more relevant for the 10-Year spread with no further long bucket sales scheduled at present). The BoE will decide on its APF sales covering the October ’26-September ’27 period at the September ’26 MPC.
• Ongoing skew shorter in the WAM of the DMO’s issuance profile (possibly by combining the medium/long syndication baskets or continuing to cancel long auctions). 

Fig. 1: UK 10- & 30-Year Swaps Spreads (bp)

Source: MNI - Market News/Bloomberg Finance L.P.