Andy Burnham's first day as prime minister on July 20 moved the Gilt market. Not because he sacked Rachel Reeves as chancellor of the exchequer, which had been widely expected, but because he said he would seek to use "any flexibility" within the government's self-imposed fiscal rules.
The comment briefly pushed the 10 year yield above 5%.
The market was caught off guard that evening when Burnham named John Healey as the new chancellor, a choice very few had predicted. But nerves eased over the week as Healey repeatedly stressed fiscal discipline, and investors judged him a safe pair of hands, at least compared with Ed Miliband.
The real repricing came from oil. An escalation of fighting between the US and Iran pushed government bond yields higher across Europe and north America last week, and Gilt and Sonia swap rates climbed with them.
Floating free
Weeks like last week help explain why part of the sterling market has turned away from fixed coupons.
SSA borrowers have sold £5.5bn of Sonia-linked floating rate notes in seven trades this year, according to GlobalCapital's Primary Market Monitor. By this point last year they had put out one trade of £350m, and by year end £2.4bn.
When yields are swinging on politics, oil and shifting interest rate expectations, duration is the risk investors want least, and floating rate notes remove it. Those buyers have been insulated from the gyrations in global bond markets and also gain if rates rise: if the Bank of England delivers the rate rises now priced in, their income goes up.
The protection belongs to the investor, not the issuer, though issuers do not mind. Most SSAs swap their proceeds back to floating rates whatever format they sell, so an FRN leaves their funding cost where it would have been anyway. The format reflects what buyers want.
The floaters' main buyers are bank treasuries, which hold Sonia-referenced paper in the belly of the curve for their liquidity books.
The same bid takes fixed rate bonds if they are short enough. In June the sterling SSA market absorbed a run of Canadian deals, from British Columbia, Saskatchewan, Quebec and PSP Capital, worth £3.2bn, in five weeks. The trigger was the Bank of England making such borrowers eligible as collateral under the Sterling Monetary Framework — a move some issuers said boosted demand.
A selective bid
When SSA issuance restarts, issuers will be hoping the bid that absorbed June's deals is still there. It probably will be — for the right deal.
The bid is already selective. One SSA syndicate banker in July advised an issuer against bringing a sterling debut while summer attendance was thin.
And the range of products the market will take has narrowed from previous years. Sterling SSA supply beyond seven years, apart from the UK sovereign, has almost disappeared. None has been sold this year and the last long deal was in early 2025, according to PMM data. The sterling market cannot offer real duration to this kind of borrower, because the buyers it depends on do not want it.
The sterling SSA market has protected itself from interest rate risk by narrowing what it sells and to whom. A market that leans on one type of buyer can only grow as fast as their appetite. In this case, sterling will be exposed if bank treasury demand thins.