A spate of redemptions hitting the sterling-denominated government market this week could prompt a contraction in spreads heading into the holiday season as investors put new cash to work, market analysts forecast. In turn, these lower yields could fuel a spate of opportunistic deals from frequent borrowers in the final weeks of the year, they said.
Even Brits will be thankful come Friday, when sterling-denominated investors' pockets will be lined with about £14 billion in cash because of redemptions from borrowers including the Bank of England. And by putting this cash to work, spreads could grind tighter by up to 20 basis points in the coming four to six weeks, according to researchers.
Friday's heightened activity is unusual in its magnitude and is the last significant redemption until December 2005. The BoE is redeeming £6.6 billion of gilts and the European Investment Bank and Kreditanstalt für Wiederaufbau are paying back about £4 billion combined of non-gilt bonds. Investors will be awash in an estimated £14 billion of cash in November, including coupon payments, which is more than three times the average median amount. "Redemption spikes of this kind are purely a sterling phenomenon--euro redemptions are much more evenly spread throughout the year, with a different jurisdiction doing one every couple of weeks," noted Ben Bennett, credit analyst at BNP Paribas in London.
In response, an upsurge in issuance is expected from frequent borrowers such as EIB and KfW, who can bring deals to market quickly and take advantage of the cash burning a hole in investors' pockets.
Barbara Bargagli-Petrucci, director and head of capital markets at EIB in Luxembourg, and Nathalie Drücke, spokeswoman for KfW in Frankfurt, did not return calls by press time.
