ICE long gilt recovers to pass pre-Truss mini-budget levels

Trading in Intercontinental Exchange-listed long gilt futures has recovered to the levels seen before the disastrous UK mini-budget of October 2022 sent the UK government bond market into a tailspin.

Trading volumes and open interest in long gilt futures listed on Intercontinental Exchange (ICE) have continued to climb this year, recovering ground lost after the UK budget crisis disrupted markets in October 2022.

Trading volume this year to August 5 stood at 42.9 million contracts, which was 13% ahead of the same period in 2022 and 29% higher than the same period in 2023, according to figures from the exchange.

Open interest has also trended upward throughout the period (see graph 1), peaking at 789,261 lots at the end of July which was above the 619,562 lots immediately before the mini-budget and more than double where it was after the post-budget crash.

“The rebuilding in open interest for our long gilt futures is a clear indicator of the return of confidence in the UK market,” Stelios Tselikas (pictured), head of interest rate derivatives at ICE, said in an emailed comment. “We observe a more diverse and engaged client base, leveraging the contract to strategically allocate capital and position themselves ahead of anticipated UK interest rate movements.”

Graph 1

Source: ICE data

Open interest at the start of 2023 stood at 385,033 lots, meaning OI is now twice where it was during the crisis, and closing on its pre-crisis high of 937,000 lots in October 2021. Long gilts, one of the most liquid segment of ICE's UK rates complex, reference bonds with maturities between eight years, nine months and 13 years.

''With liquidity conditions steadily improving and open interest doubling since late 2022, the market is closely watching the upcoming UK Autumn budget,” Tselikas added. “Given the elevated debt issuance since 2020, the government's fiscal decisions will be pivotal in shaping the future landscape of the debt market.”

Elevated debt issuance has been dominating sentiment among rates traders this year. Speaking about elevated activity in US rates markets, the chief executive of rival CME Group said high levels of government debt issuance would continue to drive volumes for the exchange.

“The continuing high levels of issuance and deficit financing are tailwinds, even in the absence of Fed rate changes,” Terrry Duffy said as he presented second quarter results last month.

ICE earlier this month reported a 26% year-on-year boost to trading volume in July, driven by rates and energy markets.