Interest Rates Strategy Supply Monitor EUR, USD, GBP
10 December 2012
• EA: Spain in the market but focus on Italy
• UK: Final 2012 auctions on Tuesday/Thursday
• US: Busy 2-week period starts with 3yr auction
Euro area preview
• Final bond auctions for Spain and Austria this week with Italy holding its penultimate BTP auction as it is expected to ‘use’ the 28th December auction date. A total of €8.6bn will be offered starting on Tuesday with Austria seeking €1.1bn from RAGB 1.95% Jun-19 and 3.4% Nov-22.
More importantly, on Thursday Spain will hold its 3rd pre-funding operation for 2013 and offers the SPGB 3.75% Oct-15, 5.5% Jul-17 and 4.9% Jul-40. The size will be announced today but following last week’s disastrous auction, we should see a lower €2.5-3.5bn auction size.
This auction was the main cause of the 20bps jump the 10yr sector erasing the recent move that pushed yields at the lower level since mid-March. Additionally, following last month 32s reopening the 2040 will be the longest offered bond since Mar-2011 – another piece of evidence of Tesoro’s optimism. The busy EU calendar will affect the auction however the developments in Italy are clearly key.
Now, following the last few days’ developments, Italy enters an uncertain period which could see early elections by mid-February. On Thursday, the Italian treasury is expected to offer a new 3year BTP Dec-2015 although the recent news could push it in January 2013 (to also take advantage of the CAC addition).
Italian paper has outperforming Spain since late-November but this should reverse this week especially if Monti resigns now instead of waiting till the 2013 budget is approved. Supporting Italian paper is the scheduled redemptions/coupons of €19.7bn.
In terms of bills, Spain will hold its usual 12 and 18m bill auction on Tuesday while Greece continues with two bills: €1.25bn from a 3m bill auction and €2.125bn from a 28d bills on the same day. With coupons/redemptions totalling c. €37bn (Germany and Italy), the net market inflow should reach a strong €28.4bn.
• Final supply week for 2012 as the DMO will auction £3.25bn UKT 1.75% 2022 conventional gilt (Tuesday) and £1.1bn UKTi 0.125% 2024 linkers (Thursday).
The DMO is in the market after almost 2 weeks and over this period we have seen significant underperformance of gilts on cross-market basis vs. Bunds. Regarding 1T22, though the outright yield is trading below the level at the previous auction (6th Nov), the auction stock is cheaper on an ASW basis since then. However, the gilt has not seen any cheapening vs. the immediate neighbours and has also richened vs. the fronts on an ASW basis from the recent cheap levels (on flight to safety bid). We expect further cheapening of the stock on these measures going into the auction, but given it is the benchmark bond the auction should see decent reception.
• Last Wednesday’s news of pension consultation and likely super-long conventional next year have disproportionally affected medium-dated gilt BEI. The side effect (or rationale for the move?) has made IL24s cheaper ahead of Thursday’s sale.
The issue was already cheapening on a number of RV measures and now offers a 25bp yield pick-up over IL22s on the seasonally-adjusted real yield curve. Valuation considerations should help mitigating the reopening ‘risk’ and assure a decent take-down. Finally, with coupons totalling £0.06bn, the net market outflow will reach £4.3bn.
• With the FOMC widely expected by the market to announce another round of QE on Wednesday, there are 3 nominal auctions scheduled this week.
A new 3 year note will be offered along with the 1st reopening of the current 10 and 30 year benchmarks for a total of $66bn.
The same set of auctions in early November, and at fairly similar yield levels, saw mixed results. The 3 and 10 year notes saw average results with the indirect bid being quite low but aggressive and the dealer bid remaining weak. The Bond auction saw clearly the best results driven by a very strong and aggressive indirect bid – largest bid for more than 1 year.
The last nominal UST auctions in late November – 2, 5 and 7 year auctions – were well received but mostly driven by well placed direct bids as indirect demand remained weak. With Twist holding 4 purchases and 1 selling operations and producing a net $3.25bn market inflow and redemptions/coupons totalling $41bn, the weekly net market outflow should reach £21.8bn.
• Due to the festive period, the following week also see issuance as £113bn of the 2, 5, 7 year UST and 5 year IL auctions will be offered.
The total 2-week issuance should reach $179bn. Adjusted by the $42.5bn of redemptions/coupons/net Twist impact, the 2-week market outflow should be $136.5bn – the highest 2-week outflow for 2012 which should act as an extra upwards force in UST yields.
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