- Over £55bn in SONIA OIS swaps have traded at negative rates.
- The lowest recorded rate so far was close to minus 6 basis points.
- Swaps all the way out to 4 year maturities have traded in negative territory.
- When does the market expect negative rates and how large will the cut be?
Negative Yields on Gilts!
On Wednesday 20th May 2020, the UK sold government debt at a negative yield for the first time in history:
Looking at our data from US SDRs, this was no surprise for the market. Certain SONIA (GBP OIS) swaps have been trading in negative territory since Wednesday 13th May, about a week after they turned negative in the US.
This bout of trading at negative interest rates has recently been accompanied with a change in the Bank of England rhetoric regarding negative rates:
Let’s see what the market thinks.
How Much Has Traded?
Looking at SONIA swaps traded since April, we’ve seen the following notional amounts trade in negative territory per tenor:
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- £55bn of notional in SONIA OIS has now traded at negative rates.
- 18 (~one third) of the trades were reported with capped notional amounts, meaning that the total amount traded was much larger than reported.
- 60 trades transacted in negative territory in total.
- The shortest tenor was 1 month.
- The longest tenor was 4 years.
- The most active tenor was 3 months, with twice as many traded as the 1 month and 1 year tenors.
Bear in mind that these are only the SONIA swaps reported to US SDRs. This is not the whole market.
That said, it is telling that we’ve seen such a large notional amount traded in negative rates already. Also, due to the really flat curve, negative rates have extended out along the curve rapidly. 4 year swaps traded in negative territory! I guess this is a reflection of the European experience – once rates turn negative, they tend to stay there for a while.
When Are Rates Forecast to Go Negative?
Whilst we’ve seen 3 year swaps trade at sub-zero rates, it is not as if the whole curve before that point is in negative territory.
The most active SONIA contract, the August 2020 MPC dates (a ~6 week swap starting 6th August 2020, ending 17th September 2020) has not traded at negative rates. This has only gone as low as positive 3.6 basis points:
Since the 13th May, when forwards further along the curve headed negative, the August 2020 MPC has traded 38 times in positive territory, totaling at least £112bn (many trades at the short-end are capped at the block threshold).
Given that SONIA is already fixing at positive 7 basis points, the market isn’t expecting any cuts from the BoE imminently.
When does the market think negative rates may come to fruition?
2021
Looking at historic pricing, the first SONIA OIS swap that traded in negative territory was the 3 month June 2021 IMM contract, starting 16th June, expiring 15th September 2021. Later the same day, the March 2021 3m IMM contract also traded negative (@-1.2 basis points).
When we look at the February 2021 MPC dated SONIA contract, it was first reported trading in negative territory on 18th May, and has stayed there ever since:
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- February 21 MPC traded at 2 basis points on 18th May.
- It has since remained around that level.
- A total of £7bn (at least, most are above block) notional has traded in the Feb21 MPC contract at rates below zero.
So are we nailed on for a February 2021 cut?
December 2020
Not so fast there. The 3m December 2020 IMM contract has also traded in negative territory recently (@-3.4 basis points). The December 2020 MPC is also now in negative territory:
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- Dec20 has been one of the most active MPC-dated contracts recently.
- It first traded at a negative rate on the 18th May.
- Since then we’ve had ten trades at zero or below, totaling nearly £20bn (plus the notional above cap thresholds).
June 2021
Marking the low-point in SONIA 3 month swaps, we saw a minus 5.8 basis point print in the June 2021 contract on 21st May. The evolution of the rates has been similar to following the US story, but with a two week delay.
Current Market – BoE Watch
Based on current market pricing for MPC-dated OIS, we see the following probability of cuts per meeting:
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- There is almost a ten percent chance of a cut in rates by the time of the third meeting, in November 2020. Note that the November contract has only traded a handful of times at negative rates so far.
- The fourth MPC meeting, scheduled for December 17 2020, carries a one in six chance of cuts….
Final Thoughts
The shape of the curve doesn’t suggest that the market expects or is pricing in deep cuts into negative territory. The most negative print we’ve had is minus 5.8 basis points. However, it is not just individual contracts or forwards that have headed negative.
A total of £7bn in notional has traded in longer-term SONIA OIS, from 1Y out to 4Y, all at negative rates. More contracts have headed into negative territory as trading has continued – it has not yet corrected back into positive territory.
As we said last week, any experiment with negative rates is unlikely to be over quickly.