HALISTER1: AUCTION PREVIEW: Test for 5Y Gilts; Cheap in RV, Asset Swap

AUCTION PREVIEW: Test for 5Y Gilts; Cheap in RV, Asset Swap

(Bloomberg) -- U.K. to auction 1.5% 01/2021 gilt for GBP3.5b at 11:30am CET. Recent weak 5Y auction highlighted by analysts, notion that foreign demand is weakening misplaced; issue seen as cheap in ASW and in RV.
  • Santander (Adam Dent)
    • Low attendance in last sale may boost fears of uncovered auction; suggestions that foreign investors are shunning gilts premature, may find relief rally after this sale
    • Front-end gilts have outperformed on the curve, haven demand may persist even if yields overall begin to rise
    • In RV, 5Y gilt looks cheap, particularly vs old high coupon bonds; recommend using auction to extend from 2020 issues into 2021
  • Barclays (Khrishnamoorthy Sooben)
    • Prior auction of this gilt caused a stir with cover ratio of 1.07, 4.2bps tail; there is little evidence to support recent discussion of weakening demand at auctions; selling of gilts in Jan. by overseas investors is a typical phenomenon
    • Auction should benefit from RV cheapening of the issue in ASW, a solid result will temper concerns over a structural weakening in demand
  • BNP (Parisha Saimbi)
    • 0.70% yield level is lowest ever; 2015 saw stellar inflows into U.K. gilts by overseas investors, though have suffered large outflows in Dec., Jan.
    • 5Y has outperformed on the curve, will be difficult for curve to steepen unless rate cuts are priced in, longer- term rates selloff
    • In RV, bond looks ~5bps cheap vs z-spread curve, offers opportunity to switch out of the older, rich 5Y gilts, and into this benchmark
  • RBC (Peter Schaffrik)
    • This issue almost certain to be increased further; as a result remains cheap on curve; sits a good few bps cheaper than peers on ASW and is unlikely to change
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Adam Dent (Abbey Natl Treasury Services)
Khrishnamoorthy Sooben (Barclays PLC)
Parisha Saimbi (BNP Paribas SA)
Peter Schaffrik (RBC Europe Ltd)

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