AUCTION PREVIEW: 7-Year BTP Seen Cheap on Relative Value Basis
(Bloomberg) -- Italy to sell 0.05% 10/2019 for EU2.5-3b, 0.65% 10/2023 for EU2.25-2.75b, 2.25% 09/2036 for EU1-1.5b at 11am CET, equivalent to around EU4m/01 in risk, close to 40k BTP futures.
- Analysts see 20y bond supported by rich repo levels, recent richening; 7y point seen offering value on the curve, though mixed views on front-end bond given impending DBRS review
- Citi (Saumesh Dutta)
- 7y sector is trading cheap vs fitted curve; bond has cheapened on the 05/2023-10/2023-05/2024 fly since last November and looks cheap since its issuance last September
- 20y is trading rich vs fitted curve, although it has recently cheapened on the BTP 10s20s30s yield fly, it looks rich over an 8-month trading history, also offers limited RV
- Mizuho (Antoine Bouvet)
- Auction comes after threat of an additional referendum, on labour market reform, eased after yesterday’s court ruling, which helped market sentiment towards Italy
- 7y sector stands at a cheap level compared to recent history, such as on 06/2021-08/2023-06/2025 butterfly, which should help support RV demand
- 20y tap was anticipated due to its history of specialness on repo; richening on the curve late last year suggests demand for the bond and bodes well for today’s auction
- BBVA (Jaime Costero)
- 3y issue trades slightly rich on the fitted curve; cautious on the front end ahead of DBRS decision on Friday as a downgrade would raise ECB collateral haircuts and have negative potential implications for the front end of the curve
- 2023 issue has cheapened cross-market vs Spain, wider by ~8bps vs SPGB 2023, though now trades in the middle of the spread ranges in place since October
- Special pricing in repo may support appetite for the 20y issue; bond is fair value on the curve
- Unicredit (Chiara Cremonesi)
- Auction size is “contained”, potentially given expectations for the BTP volatility given the Court hearing and DBRS review
- Low amount in the 20y BTP may signal that a new 15y benchmark is in the pipeline; see best window for this next week
- ECB inclusion of maturities below 2y, should be supportive for front-end, tactically position for 12- month/3y flatteners
- Like owning 7y area vs the 5y, as it offers 60bps of yield pick-up, slightly above the 2016 peaks
- 20Y benchmark offers 31bps of yield pick-up vs. the 15Y benchmark, at the high end of the historical range
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers UCG IM (UniCredit SpA)
People Antoine Bouvet (Mizuho Financial Group Inc)
Chiara Cremonesi (UniCredit SpA)
Jaime Costero (Banco Bilbao Vizcaya Argentaria SA)
Saumesh Dutta (Citigroup Inc)
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