The outlook for UK swaps will be determined by a wide variety of factors, not least the fundamental economic outlook – including growth, inflation and public finances – which drives interest rates and bond yields.
The outlook for UK swaps will be determined by a wide variety of factors, not least the fundamental economic outlook – including growth, inflation and public finances – which drives interest rates and bond yields. It will also depend on interbank counterparty risk, which is one of the key drivers of swap spreads (the spread between the swap rate and the underlying bond yield). The significant increase in counterparty risk since the start of the credit crisis and the failure of Lehman Brothers is shown by the spread between interbank rates and expected overnight rates which remains well above historical norms.
Gilt repo volumes have risen
The closure of unsecured wholesale funding may partly explain the strong rise in secured funding, with gilt repo volumes rising to £682bn on latest Bank of England figures, and the widening spread between repo rates and OIS, see charts a and b. Indeed, the repo market for high-quality collateral could grow further in importance as a source of
funding for banks, even though the use of repos specifically to grow balance sheets is likely to continue to fall, as banks deleverage. However, the increase in the size of the repo market shows how important a source of liquidity to the financial sector it has become. In some jurisdictions, this is leading to talk of the need for some sort of clearing system.