HALISTER1: AUCTION PREVIEW: 10y Gilt Breakevens Look Rich, Say Analysts

AUCTION PREVIEW: 10y Gilt Breakevens Look Rich, Say Analysts

(Bloomberg) -- U.K. to sell I/L 0.125% 03/2026 gilt for GBP1.1b at 11:30am CET, equivalent to ~13k gilt futures.
  • RBC (Vatsala Datta)
    • Outright real yields ~18bps lower since last sale, but have surged ~45bps from lows seen in early October in the recent sell-off
    • 5s10s real yield curve has steepened quite aggressively, more than that implied by the outright market sell-off
    • Bond looks cheap vs immediate neighbors, but has given up some of that cheapness in the recent days
    • Breakeven valuations look stretched; however, still expect the auction to be well received; anticipate demand on the back of surge in outright yields and steepening in the curve
  • Santander (Adam Dent)
    • Bond is likely to remain on-the-run with quarterly sales throughout 2017; supply dynamics should be supportive, especially once the syndication in week of Nov. 28 has passed
    • While spot inflation disappointed last month, expected to accelerate rapidly over coming months; expect linkers to continue to outperform nominals
    • 10y has not led the linker sell-off as much as nominals, but they are attractive on the curve; bond is pretty neutral on RV
  • RBS (Oriane Parmentier)
    • Surprisingly low inflation figures, small bounce in GBP, has been negative for breakevens this week, though still remain close to top of post-crisis range
    • Believe U.K. breakevens have “significant overshot” levels justified by near term inflationary shock, this supply may be enough to bring this area “down to earth”
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Vatsala Datta (RBC Europe Ltd)
Adam Dent (Abbey Natl Treasury Services)
Oriane Parmentier (Royal Bank of Scotland Group PLC)

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