Back
4 May 2016
UK: Reopening auction of 1.5% jan-2021 conventional gilt – Lloyds Bank
Eric Wand, Research Analyst at Lloyds Bank, suggests that in what is a compressed supply schedule, Wednesday sees the DMO selling £2.75bn 1.5% Jan-2021 conventional gilt stock.
Key Quotes
“This sale represents the second of three 1H21 re-openings over the quarter and will raise the outstanding to an increasingly mature £25.66bn, ex-any subsequent PAOF allocation. The recently revised DMO bidding arrangements would appear to be alleviating some of the auction pressures witnessed into the back end of FY 15-16, with the previous 1H21 sale producing a healthy outcome (bid-to-cover: 2.01x, tail: 0.3bp). At just £1.29m/bp of risk, we expect this operation to comfortably exceed the average metrics recorded at the previous four 5yr sales (b/c: 1.5x, tail: 1.48bps, which includes the poor 20-Jan auction).
While immediate pre-sale price action will likely determine marginal demand, from an outright spot and forward yield perspective, the backdrop is markedly more palatable than that prevailing at the 5-Apr offering, even if current levels are off their most attractive of late on this basis. In yield relative value terms, 1H21s continue to offer a pick-up out of surrounding stocks, although trade at similar levels to early-Apr versus their immediate neighbours. Modestly improved terms are available, however, on slightly wider ‘flies, with 19s21s22s, for example, lagging the latest re-flattening out to intermediate maturities.
Some interest is also anticipated via the swap spread route. Despite approaching the latter stages of its immediate tapping cycle (a new 5yr line is expected in Q2 FY 16-17), the auction stock remains a ‘standout’ in this sector of the ASW structure. In light of the retracement off recent spread ‘wides’ some short covering is likely to emerge around the supply. RV ASW switching interest is also seen providing some auction support. From a cross-market standpoint, the recent tightening in UK-US spreads can also serve to generate a degree of auction ‘covering’ demand, as broader attention starts to drift towards the June FOMC, amidst what is an increasingly asymmetric risk/reward profile in respect of the USD leg.”
Key Quotes
“This sale represents the second of three 1H21 re-openings over the quarter and will raise the outstanding to an increasingly mature £25.66bn, ex-any subsequent PAOF allocation. The recently revised DMO bidding arrangements would appear to be alleviating some of the auction pressures witnessed into the back end of FY 15-16, with the previous 1H21 sale producing a healthy outcome (bid-to-cover: 2.01x, tail: 0.3bp). At just £1.29m/bp of risk, we expect this operation to comfortably exceed the average metrics recorded at the previous four 5yr sales (b/c: 1.5x, tail: 1.48bps, which includes the poor 20-Jan auction).
While immediate pre-sale price action will likely determine marginal demand, from an outright spot and forward yield perspective, the backdrop is markedly more palatable than that prevailing at the 5-Apr offering, even if current levels are off their most attractive of late on this basis. In yield relative value terms, 1H21s continue to offer a pick-up out of surrounding stocks, although trade at similar levels to early-Apr versus their immediate neighbours. Modestly improved terms are available, however, on slightly wider ‘flies, with 19s21s22s, for example, lagging the latest re-flattening out to intermediate maturities.
Some interest is also anticipated via the swap spread route. Despite approaching the latter stages of its immediate tapping cycle (a new 5yr line is expected in Q2 FY 16-17), the auction stock remains a ‘standout’ in this sector of the ASW structure. In light of the retracement off recent spread ‘wides’ some short covering is likely to emerge around the supply. RV ASW switching interest is also seen providing some auction support. From a cross-market standpoint, the recent tightening in UK-US spreads can also serve to generate a degree of auction ‘covering’ demand, as broader attention starts to drift towards the June FOMC, amidst what is an increasingly asymmetric risk/reward profile in respect of the USD leg.”