HALISTER1: AUCTION PREVIEW: 20Y Gilt Linker Supported by Hedging Demand

AUCTION PREVIEW: 20Y Gilt Linker Supported by Hedging Demand

(Bloomberg) -- U.K. to sell I/L 0.125% 11/2036 for GBP800m at 11:30am CET. Analysts optimistic on the sale given expectation of hedging demand, modest size on offer.
  • SocGen (Marc-Henri Thoumin)
    • 20y demand is more likely to be driven by long-term hedging/liability driven investment than by the inflation outlook
    • Real yields are well off recent lows and with this being the last linker auction of the calendar year, expect decent demand from domestic hedging
  • Barclays (Henry Skeoch)
    • The issue is not particularly cheap on the curve, which may prompt some concession; size equivalent to GBP1.1b in cash size, a fairly modest GBP2.2mn/bp of risk
    • Expect the issue to continue to be frequently tapped until built up to benchmark size, which should justify some new issue discount in its valuation
    • Choice of the bond for the auction suggests that there should be demand for it, expect the auction to be well absorbed
  • Santander (Adam Dent)
    • Bond to be tapped regularly for the foreseeable future; hold a bullish view on gilts in coming weeks, particularly nominals, but also linkers
    • Inflation breakevens are “very high”, do not see fundamentals as justifying these levels
    • 20y sector appears slightly cheap on both nominal and real yield curves, this bond in particular; recommend buying auction bond vs IL26s and IL44s at 7.6bps, targeting 3.5bps
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Marc-Henri Thoumin (Societe Generale SA)
Adam Dent (Abbey Natl Treasury Services)
Henry Skeoch (Barclays PLC)

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