HALISTER1: AUCTION PREVIEW: Long-End Gilt Demand Supported by QE Outlook

AUCTION PREVIEW: Long-End Gilt Demand Supported by QE Outlook

(Bloomberg) -- U.K. to sell GBP1.5b 4.25% 09/2039 at 11:30am CET: analysts see demand fueled by drive for QE trades, as the sector stands to be largest beneficiary of potential BOE QE.
  • Citi (Saumesh Dutta)
    • First long-end auction since June 7; high bid/cover ration at recent 2060 mini-tender may reflect “pent-up demand”
    • Like overweighting the 15-20Y area, given this sector tends to be a beneficiary in case QE resumes; 2039 have cheapened on 2025-2039-2052 fly over past year
    • The auction bond has also cheapened on the curve vs neighboring securities offering value
    • 09/2039s has outperformed vs swaps over the past 3 months, but is still cheap compared to the lows of 2015
  • RBS (Simon Peck)
    • Outright yield is ~10bps above early July lows, expect RV demand for this issue
    • Continue to see 15-20Y sector as largest beneficiary of QE, despite slightly longer maturity, 23Y bond should perform in tandem
    • Recommend using the auction as an opportunity to buy the bond on 2034/2039/2045 fly, enter at 12bps, target 6bps, stop at 14bps
  • Santander (Adam Dent)
    • Outstanding size in bond is still relatively small with a large holding by the APF
    • Supply dynamics favorable for gilts, with coupons and light nominal sales ahead; sector has benefited from QE expectations that are likely to persist, even if it takes time
    • Gilts closer to 20Y maturities have performed even better, which “we would fade via ASW”; recommends buying 2039s as an ASW box vs 2036s, entering at 10bps, target 8bps, stop at 11bps
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Saumesh Dutta (Citigroup Inc)
Adam Dent (Abbey Natl Treasury Services)
Simon Peck (Royal Bank of Scotland Group PLC)

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