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2026-02-20 17:04:21
[UK Public Sector Unexpected Surplus Leads to Significant Narrowing of Long-Term Swap Spreads] ⑴ The UK public sector recorded a record negative net borrowing in January, indicating a fiscal surplus, which triggered a significant reaction in the swap market. After the data release, swaps underperformed government bonds, particularly at the longer end of the yield curve. ⑵ In terms of spread changes, the narrowing was more pronounced with longer maturities. The 2-year swap spread narrowed by 0.5 basis points, the 5-year by 0.9 basis points, the 10-year by 1.2 basis points, and the 30-year by 1.3 basis points. ⑶ It should be noted that since the entire SONIA swap spread curve is negative, the market uses a more negative spread to indicate that swaps are outperforming government bonds, while a narrowing of negative spreads indicates that swaps are underperforming government bonds. The current narrowing of spreads across maturities suggests that swaps are weakening relative to government bonds. ⑷ This trend reflects the market's pricing in an improved fiscal situation. Public sector surpluses reduced recent pressure on government bond supply, providing relative support for government bonds. Swaps, on the other hand, reflect interest rate expectations and bank credit risk more, and the pricing difference between the two widened further after the data was released.
