巴黎银行-全球-外汇策略-长期美元兑英镑远期汇价收敛-20181210-9页_1mb

G10 Interest Rates Summary: Long-Dated USD vs GBP Forward Swaps Convergence

Core Content

This report discusses the expected convergence of long-dated USD and GBP forward swaps due to structural changes in pension fund strategies and evolving macroeconomic conditions. It outlines the implications of de-risking by Defined Benefit (DB) pension schemes in both the US and the UK, as well as the impact of potential Brexit scenarios on interest rate differentials.

Main Drivers of Convergence

1. Divergent De-Risking by US and UK DB Schemes

• US DB Schemes:

  • Have a large duration gap and are incentivized to reduce it.
  • Show increased activity in stripping corporate bonds, with 2018 being a record year for Treasury strip buying.
  • The 100 largest US DB schemes have improved solvency ratios, with the latest at 94.4%.
  • US DB schemes are still behind UK peers in bond allocation (only 45% of assets in fixed income vs 59% in the UK).

• UK DB Schemes:

  • Have already de-risked significantly and are approaching maturity.
  • Are shifting from Liability Driven Investment (LDI) to Cashflow Driven Investment (CDI), reducing demand for long-dated Gilts.
  • The PPF levy has dropped from 8bp to 4bp since 2012, indicating advanced de-risking.

2. US-UK Rates Divergence to End

• US:

  • The Fed is expected to halt its hiking cycle in H1 2019 due to slowing GDP growth.
  • US forward rates are likely to flatten as the economy slows and the Fed shifts to a neutral or easing stance.
  • The US term structure of rates is expected to peak, with long-dated forwards declining.

• UK:

  • Long-dated forwards are expected to rise regardless of Brexit outcome, due to potential rate hikes by the BoE or inflationary shocks.
  • Even in a disorderly Brexit, long-dated forwards are unlikely to exceed 2.0%, offering little value.
  • The BoE is expected to raise rates twice in 2019 if a withdrawal agreement is reached.

Key Implications

• The UK 10y20y swap curve is likely to steepen, while the US curve is expected to flatten.
• The forward rate differential between the UK and US is expected to narrow over the 2019 horizon.
• This convergence is driven by the contrasting de-risking strategies and macroeconomic outlooks of the two countries.

Trade Idea

• Position: Receive 10y20y USD swap, versus pay 10y20y GBP swap.
• Entry: Spread of 136bp.
• Target: 70bp over a 1-year horizon.
• Stop: 160bp.
• Carry: Flat.

Supporting Data

• Figures 1 and 2 show the current and historical spread between US and UK 10y20y swaps.
• Figures 3-10 provide insights into pension fund liabilities, LDI activity, and bond allocation trends.

Risk Considerations

• The report is a marketing communication and not investment research.
• It may contain Research content under MiFID II unbundling rules.
• It does not constitute an offer to sell or issue securities.
• No guarantee is made regarding the accuracy or completeness of the information.
• Past performance is not indicative of future results.
• The report may contain simulated performance data, which is for illustrative purposes only.

Legal and Regulatory Notes

• The document is not a prospectus, advertisement, or public offering in the US, Canada, or other jurisdictions.
• It is subject to the UK Financial Conduct Authority rules and MiFID II regulations.
• BNPP may have conflicts of interest due to its involvement in related transactions or advisory roles.
• The information is confidential and not to be copied or distributed without prior consent.

Conclusion

The convergence of long-dated USD and GBP forward swaps is expected due to the contrasting de-risking strategies of US and UK DB schemes and the potential for UK long-dated forwards to rise. This presents a strategic opportunity for investors to take advantage of the narrowing spread between the two currencies.