HALISTER1: AUCTION PREVIEW: 30Y Gilt Supply Supported by Coupon Flows

AUCTION PREVIEW: 30Y Gilt Supply Supported by Coupon Flows

(Bloomberg) -- U.K. to sell 4.25% 12/2046 for GBP1.5b at 11:30am CET. Analysts are mixed on the sale, see auction supported by upcoming pause of long-end supply, coupon payments, RV considerations.
  • Citi (Saumesh Dutta, Jamie Searle)
    • Expect auction to go well; bond has underperformed 12/2042 and 12/2049 since the start of the year, partly reflecting the rarity of supply in this bond
    • Has also cheapened vs 01/2045s, currently close to its cheapest level in over a 1-year; limited RV on a cross- country basis
    • Auction should be supported by pause in supply around the EU referendum, coupons repayments for GBP2.7b to be repaid today (concentrated in longs)
  • Santander (Adam Dent)
    • Very rare tap of old 40Y bond, unpredictable consequences for demand
    • Supply dynamics are very supportive, coupons, index extensions, three-week supply break; while 30y gilt yields are near all-time lows, still unlikely to rise sharply soon
    • Don’t see any compelling opportunities for 30y in either direction on the broader curve; 30Y ASW still tight, but not disproportionately to USTs or 10s
    • Gilt maturities around 25Y look rich relative to 30Y even considering overall flattening of the curve; recommend buying auction bond vs 2040s at 1.5bps, target -1bp
  • SocGen (Strategists including Marc-Henri Thoumin)
    • Demand expected from GBP2.7b in coupon payments, heavily concentrated at the long end of the curve; has been a key factor driving the curve flatter over the past week
    • Bond looks cheap on fitted curve on a yield vs duration/convexity basis, though not as cheap as some peers
    • Some RV demand expected vs 01/2045s and 12/2049s after recent cheapening; lack of supply after this week with next 30Y+ sale not until August 17
    • See some risks of post supply indigestion as witnessed in February, remain cautious on auction as a result
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Jamie Searle (Citigroup Inc)
Saumesh Dutta (Citigroup Inc)
Adam Dent (Abbey Natl Treasury Services)
Marc-Henri Thoumin (Societe Generale SA)

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