HALISTER1: AUCTION PREVIEW: 5y Gilt Rich in RV, Mixed Views on Auction

AUCTION PREVIEW: 5y Gilt Rich in RV, Mixed Views on Auction

(Bloomberg) -- U.K. to Sell 0.5% 07/2022 for GBP2.75b at 11:30am CET.
  • Analysts see no sign of RV concession, sharp rise in outright yields may tempt some investors; BOE QE backstop supportive
  • Citi (Saumesh Dutta)
    • 5yr gilt yields now back to pre-referendum levels, auction will be seen as a test of demand just before the Inflation Report
    • See no sign of auction concession on the curve, as seen in yield flies vs neighboring issues
      • Issue has cheapened ~7bps on the 2s5s10s fly over past two weeks, though this fly has been strongly correlated to the spot 5y, prefer to remain cautious given the recent sell-off
    • See value in 3s5s swap spread box as both 01/2021-07/2019 and 07/2022-07/2019 swap spread boxes have cheapened over past 2 months, now look historically attractive
      • Like buying 07/2022s vs swaps boxed to 07/2019s using this auction
  • RBC (Vatsala Datta)
    • Outright yields have more than doubled since last auction, now close to 0.76%; 5y sector has also cheapened vs shorter-dated maturities, with 2s5s yield curve ~20bps steeper over the period
    • 5y gilts have also cheapened 20-25bps on cross-market basis vs bunds, USTs since last auction driven by various factors including relative rise in inflation expectations in the UK
    • With markets now pricing no probability of a rate cut next year in the U.K., see risk/reward favoring better performance in gilts heading into Inflation Report; auction offers good opportunity in this regard, given the cheapening on various metrics
  • JPMorgan (Francis Diamond)
    • Prior three short conventional gilt auctions have all been relatively well received, with bid-to-cover ratios of 2.3x, yield tail of 0.4bps on average
    • Issue does not stand out as particularly attractive from a relative value perspective, though expect to see decent auction demand given the ongoing QE program
    • At a macro level, 5Y sector looks rich on the curve, although the outright level of yields may attract buying interest
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Saumesh Dutta (Citigroup Inc)
Francis Diamond (JPMorgan Chase Bank NA)
Vatsala Datta (RBC Europe Ltd)

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