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Although long-dated UK swap spreads have recovered from cycle lows, they still operate near/below levels that were driven by the initial Budget-induced sell off linked to fiscal and issuance worry.

• This shows that while those risks have moderated from extremes, they still remain elevated when compared to the pre-Budget status quo (all else equal).
• While issuance risks don’t seem to represent a major immediate (intraday) concern for the conventional gilt market, as today’s record-sized syndication and orderbook show, the combination of slowing economic growth and already limited fiscal headroom will result in continued attention on fiscal matters in the coming months and years, as evidenced by current swap spread pricing.

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

Source: MNI - Market News/Bloomberg

• Secured Overnight Financing Rate (SOFR): 4.35% (+0.00), volume: $2.316T
• Broad General Collateral Rate (BGCR): 4.33% (-0.01), volume: $916B
• Tri-Party General Collateral Rate (TCR): 4.33% (-0.01), volume: $899B
• (rate, volume levels reflect prior session)

Overnight SOFR & Treasury option focus remains on downside puts, lighter volumes partially tied to Japan out overnight, accts plying sidelines ahead Fed Chairman Powell's testimony to the Senate Banking Committee at 1000ET. Underlying futures lower, curves bear steepen with short end rates outperforming. Projected rate cuts through mid-2025 look steady to mildly softer vs. late Monday levels (*) as follows: Mar'25 steady at -1.6bp, May'25 at -6.8bp (-7.3bp), Jun'25 at -15.3bp (-15.9bp), Jul'25 at -20.6bp (-21.1bp).

• SOFR Options:
  • 4,000 SFRH5 95.62/95.68 put spds ref 95.71
  • 1,750 SFRH5 95.68 puts vs. 95.75/95.81 call spds
  • 2,500 SFRJ5 95.68/95.75/95.81 put flys ref 95.825
  • 1,500 0QM5 96.25/96.50/96.75 call flys ref 96.05
• Treasury Options:
  • 5,000 USH5 112 puts, 6 ref 114-26
  • 2,000 TYH5 109.5/110.5 1x2 call spds
  • 1,200 TYH5 107/107.5 3x2 put spds
  • 2,200 TYJ5 107/108.5 put spds ref 109-01