HALISTER1: AUCTION PREVIEW: 10y Supply Provides Test for Gilt Market

AUCTION PREVIEW: 10y Supply Provides Test for Gilt Market

(Bloomberg) -- U.K. to sell 1.5% 07/2026 for GBP2.5b at 11:30am CET.
  • Dip buying demand for gilts may be tested after recent sell- off; analysts highlight recent cheapening of 10y sector vs wings, though mixed views on whether to fade; however, 10y gilts unanimously seen as cheap vs swaps
  • Santander (Adam Dent)
    • U.K. economic data has worsened a little recently, which should reaffirm the dovish MPC
    • See recent rates sell-off as very overstretched given now back to immediate post-referendum levels
    • 10y gilts have underperformed vs wings, suggest trading against this swing, buy 10y on 5s10s30s, enter -9.5bps, target -15bps
    • 10y also looks appealing on the ASW curve, hold a steepening bias on 5s10s swaps
  • RBC (Peter Schaffrik)
    • During recent sell-off, 10y sector has underperformed on the curve, with 5s10s30s curve ~13bps cheaper, mainly as a result of steeper 5s10s curve
    • Cross-market spreads have widened significantly, with the spread vs U.S., Germany at highs since early-July
    • Auction bond also looks cheap on ASW curve, with 5s10s ASW box spread at the widest level since April this year
    • There has been limited concession vs immediate neighbors, both on yield and ASW basis
    • Expect the auction to be well received given relative cheapness, continued support from BOE buybacks in 7-15y sector later today
  • SocGen (Marc-Henri Thoumin)
    • Auction has DV01 of GBP2.3m and therefore should not be that challenging for the market, particularly given BOE 7-15y buyback later in the session
    • There has been no pre-supply concession; on the curve, the issue trades ~3.5bps rich to fair value on a plot of z-spreads against duration, partly justified by low coupon vs neighboring bonds
    • Issue is most attractive on ASW as 2026s have cheapened by ~10bps since early September compared with less than half that amount in the 5y sector
      • Overall, auction should go well; recommend “cash- for-cash” extension out of the 5y sector into the 1.5% 07/2026 (effectively receiving 5y5y in gilts) vs paying 5y5y in swaps
  • Citi (Peter Goves)
    • 10y sector has cheapened on the curve over past two months; expect the 2s10s30s fly to cheapen further as 10s30s curve flatten more, almost regardless of market direction
    • Over past two months, both 10y and 30y gilts have underperformed swaps, though more so in 10y; 10s30s swap spread box now trades close to lowest level for 8 months, see potential for box to correct from here as 10s outperform
    • Strong demand may indicate that dip buyers are emerging, whilst a weak auction could signal a further leg to the sell-off
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Adam Dent (Abbey Natl Treasury Services)
Marc-Henri Thoumin (Societe Generale SA)
Peter Goves (Citigroup Inc)
Peter Schaffrik (RBC Europe Ltd)

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