AUCTION PREVIEW: Relative Value Seen Aiding 20-Year Gilt Linkers
(Bloomberg) -- U.K. to sell GBP850m 0.125% 2036 I/L bonds at 11:30am CET.
- Mixed views on auction given real yields close to all-time lows, high levels of breakevens; analysts look at relative value, though show some concern given high levels of volatility
- Santander (Adam Dent)
- Upside data surprises, political rhetoric have made the market too complacent about further monetary policy easing
- Real yields have failed to break through -1.9% so far, but expect this to be retested; long breakevens are unsustainably high, given the very low nominal interest rates
- 20y sector looks slightly cheap on broader curve, whereas 40y has been stronger and may face a syndication
- Recommend buying auction bond vs I/L 2058s at 4.7bps, target 7.5bps, stop at 3.5bps
- Bond looks cheap on local curve, though this is justified by its on-the-run status
- RBC (Vatsala Datta)
- Despite being modest in size, auction comes at a time when real yields are at all-time lows, outright breakevens have risen amid falling GBP and there are expectations of fiscal stimulus
- Expect demand to be driven by relative value interest; auction bond looks attractive on micro relative value against immediate peers
- 20y sector looks cheap on broader real yield, breakeven curves, but this has also been due to a directional move with the steepening in real yield/flattening in the breakeven curve
- Expect to see decent interest in the auction today, given modest size, lack of supply in this part of the real curve until end of this year, as well as relative- value demand
- SocGen (Marc-Henri Thoumin)
- Auction provides big test for UK linkers after the huge rise in breakevens, bias for higher real yields
- Significant rise in U.K. breakevens instigated by surge in gilt yields, GBP depreciation, while real yields have remained fairly close to their all-time lows
- Historical breakeven levels, high volatility in the market suggest caution; case for de-risking by liability-driven investments and defined benefit pension funds will continue to be a driver over the medium term
- Heightened volatility, expensive breakevens may result in hedgers waiting for a gentle increase in real yields or for the November linker syndication
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Adam Dent (Abbey Natl Treasury Services)
Marc-Henri Thoumin (Societe Generale SA)
Vatsala Datta (RBC Europe Ltd)
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