GLOBAL INVESTMENT STRATEGY, EXECUTION AND RISK MANAGEMENT FOR INSTITUTIONAL INVESTORS

        Trade ideas at the bottom…

 

• US/UK/EUR Curves - My 2c
  Article on BBG this am: Bond Traders See 'Green Light' to Keep Driving the Curve Steeper

Time for a reality check I think.

• We've been looking for the US/UK/EUR curves to steepen further all week (as per our emails/ chat posts) in anticipation of the FED's shift on inflation yesterday and in recognition of a resumption of a busy EGB issuance cycle next week, adding to a mountain of outstanding debt across most of the G-7.

• The Fed's assumed tolerance for a 2%+ inflation rate in an effort to arrive at an average 2% rate is a logical, pragmatic approach to what has become a very thorny issue for central bankers all over the world, a by-product of the virtually free money approach to monetary policy since the financial crisis in 2007/08. While the market's bear-steepening response was warranted yesterday, exacerbated by thin summertime liquidity and a market still net long duration, we think it's important to bear in mind that just because Powell said the FED would tolerate above target inflation for a while when warranted (like now, for ex), IT DOESN'T MEAN THAT SPIKE IN INFLATION IS IMMINENT! Powell went to great lengths to explain this shift, admitting that this process is 'more art than science' and that inflation should be in the same category as employment in terms of the manageability of the level of both indicators. However, at no point did he provide a roadmap as to how the FED would help to revive inflationary pressures.

• With the YOY core PCE deflator release later today expected to come in at 1.2% after an extraordinary nosedive last qtr, it seems a move north of 2% is not only unlikely until next year at the earliest but foolhardy to expect it without a massive surge in commodities and rising base rates. The chart below of YOY Core PCE shows the 20 month moving avg since 1995 has been 1.65% - nowhere near 2%, let alone 2.5%+.

 

• As noted yesterday, we think the Fed's move raises the odds that the BoE (via Bailey at 14:05) will lean on the hawkish side of neutral too, putting further bear steepening pressure on the GILTS curve. While the UK economy has had an impressive bounce in Q3 as the Covid lockdown was largely lifted, it is indeed premature to suggest there's plain sailing ahead, especially as the government begins to wean the economy off the furlough scheme and other support mechanisms. For example, August preliminary services PMI came in at 60.1, the highest level in over 5yrs and in reality, one that will be difficult to sustain on a medium term basis.

 

• From a markets perspective, we've seen a huge bearish move in gilts. The combination of a massive accumulation of public debt (now well north of £2trln), an unexpected bounce in core CPI in July to 1.8% and the BoE's reduction in QE support from Apr-Jul levels have driven much of the bear steepening. As we can see from the chart below of the UKT 10-30s, the curve has only been this steep 3 times in the past two years and 30yr gilts now trade ~89bps cheap to O/N SONIA, the cheapest they've been since May 2019 (not including the 2 day spike in March).

 

 

 

• A monstrous issuance calendar, by UK standards, will continue to challenge the DMO well into next year. All told, we think the DMO has done a masterful job of managing the government's funding while remaining sensitive to the needs of their client base. As noted yesterday, the DMO is slightly ahead of schedule for their Apr-Nov funding total of £385bn with about £105bn left from Sep-Nov. On a short-medium term basis, here's what we've got:
• Wed Sep 2 – Linker 56s tap & 20y+ 20y+ APF
• Thu Sep 3 – 10am £2.75bn 0E28s tap, 11:30am £2bn 1Q41s tap & 7-20y APF (Smallest week for conventionals in a while)
• Mon Sep 7 – 3-7y APF & Cpn date for Mar/Sep gilts. BIG index moves across the curve, especially in front-end.
• Tues Sep 8 – Day – UKT 7/35s syndication & 20y+ APF
• Wed Sep 9 – 7-20y APF
• Thu Sep 10 – 10am £3.5bn 0E23 tap, 11:30am £2.25bn 0F50s tap (est)
• Mon Sep 14 – 3-7y APF
• Tues Sep 15 – 10am £3bn 1Q27s tap (est), 11:30am £2bn 1T37s tap (est), 20y+ APF
• Wed Sep 16 – 10am £2.75bn 0R30s Tap and 7-20y APF.

We can see above that the pace of auctions has slowed somewhat, especially in conventionals – due largely to the 35s and 61s syndications. That said, the sizes of the taps have been reduced from the pace of last qtr too, lining them up a bit better with the APF support.  Issuance in the 15-20yr sector is the largest in the next two weeks by far with 41s, the syndication then 37s the week after. There is also a noticeable dearth of issuance in the 5yr sector with the next tap not until Sep 24^th's 0E26s auction. A big index extension in the 1-5yr bucket as the 3T20s mature and 3T21s slip below 1yr will help anchor 0F25s and even 225s on the curve.

 

• Despite what seems like a massive amount of risk, we think the recent bear steepening has provided ample concession for the market to support this 15yr deal and the 0F50s tap that follows.  We will be using any further steepening into today's close/Tuesday's open to unwind steepeners and begin accumulating longs in the 15yr sector via bflies like the 4T30-1Q36-4H42, et al. We'll also look to

 

 

UKT 0T23-0F25 Sprd – Could flatten into Sep index moves.

                  

 

       UKT 1Q27 into 0E28 – 28s will be tapped next Thursday and the 27s on Sep 15^th. Z-sprd box back close to the wides and yield sprd new wides. GEMMs have been loathe to part with their 0E28s this week, however, given the last post-auction richening.

       

 

            Will call to discuss..

 

            Thanks 

 

            Mark

 

 

 

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

GILTS... APF Today

> "Clean up on aisle 5!"

> It seems a bit odd to suggest that this week's gilts supply went poorly when each of the issues tapped are at/near their richest ever yield levels on the open this am. But by our usual auction metrics, demand was sloppy in each of the taps with GEMMS able to grab the issues at solid discounts from the snap levels that were already at/close to the day's lows.

 

> While we don't need gilts richer in absolute terms, there are sectors of the curve that have been beaten up lately, largely in anticipation of tomorrow's Sep-Nov supply calendar. The 4Q36s and 1T37s stand out like a sore thumb as the cheapest issues on the curve as the mkt awaits confirmation of a Sep 15yr syndication tomorrow (some GEMMS are axed buyers of them this am BTW) and the 0E26s, 0F50s and ultras have been banged up a bit too.

 

A 4bps move in this fly is a lot, especially 5 weeks-plus before the deal is even expected to happen. What if the DMO decides NOT to bring the 15yr?

 

 

 

> Today's APF will be interesting, not just to mop up some net DV01 but to see if the issues that have been dumped into their ops over the last week (36s, 37s, 71s, etc) make another appearance. The APF has bought a total of £1.458bn 1F71s in the last 3 APF operations – the equivalent of an auction – which has kept the issue bid.

> The 0E26s, 1Q27s, 1F28s, 0R30s, 1Q41s and 1F54s are all ineligible today. With just £370mm notional left of the 0S29s and the 27s and 1F28s not available, this is likely to be an off the runs show.

 

There's been a good deal of chatter about  which issues are likely to feature highly in the long-end auction cycle in Sep-Nov. Given the minutes from the DMO's consultation regarding tomorrow's supply calendar, it seems the 1T57s are much less likely to be tapped at all in favour of the 61s (which have yet to be tapped) or even the 71s. Thus suggests the Aug 11^th tap of the 1T57s could be its last (for a while at least) which could prompt the RV community to buy the issue on the curve. They look cheap on most metrics but these stand out to us:

 

UKT 1T49-1T57-1F71 fly… This comes with a warning label given the volatility of the 71s but this illustrates how cheap these 57s have become.

 

UKT 1T49-1T57-2H65 fly looks similar with less volatility…

 

More to come…

 

Mark

 

 

 

 

 

 

 

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

 

GERMANY - 7yr Tap Today – 4bn DBR 0 11/27s

> These are a good news - bad news in my mind...

> Good news is this issue's cheap in RV by most metrics.  The 2/28-11/27-8/28 fly is at its cheapest at +5.25bps mid, the DBR 8/25-11/27 Z-sprd has steepened to +3bps this am (cheapest since end of June and the sprd to EONIA has cheapened back to -30bps.

 

> The bad news is Germany is behind on their issuance for 2020, this issue is still only 10bn and the outright yield level is an eye watering -61bps in an environment where most of our dealers are calling for 10yr DBRs to cheapen into year end.

> This will be popular with RV guys and there should be a bit of extension demand into this issue given month-end index flows at week's end. However, not sure there's still a pool of cash waiting in the wings at this stage and we're going to get a lot more of these before they're done.

 

 

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

 

GILTS... Quick Colour

• Pre-supply/no APF day so we'll spend it trying to cheapen up this week's tap issues a bit and ruminate over whether the sales of ultras into the APF last Tue/Thu are bullish or bearish for the sector. We've all got one eye on the covid-tracker too given the pop in cases seen in some regions and the Spanish-quarantine shocker that hit Saturday am. 

• DMO consultation at 3:30pm today will help to further clarify the Sep-Nov supply calendar due to be released this Fri at 7:30am. The only real debates are the maturity/timing of the 15yr syndication and whether there's both a long linker AND an ultras deal. If the maturity of the 15yr deal is 16yrs+ and not a 14.75yr (as some expect to avoid index chaos around the 15yr point) then the DV01 of the all of that long issuance declines along with steepening pressure. Similarly, while they may not announce the exact maturity of an ultras syndicated deal, we'd bet that it's likely to be 2061s or maybe even 2071s.

• 1Q27s tap tomorrow but few signs of any meaningful concession on the curve yet. The 1H26-1Q27 Z-sprd box has flattened back to the 2.4bps area  (+2.0bps area has held since the end of Apr) and the 1H26-1Q27-1F28 fly has grinded richer. We've been fans of this issue for the last few weeks and were hoping for a cheapening into tomorrow to add to longs as they slide into the 3-7yr APF bucket next week.

 

 

• While the 1Q27s have been solid, the 1F54s have wobbled into tomorrow's tap.  They occupy that no-mans land between the 30yr and 40yr point and while they've been cheapening on the curve (see chart below) as ultras bounced, they'll be tapped again on Aug 25^th and at least once more in the Sep-Nov calendar (£1.5bn tap tomorrow takes them to a max of ~£17.5bn, still the smallest seasoned issue in the sector aside from 1F71s). Where they are likely to see some short covering interest is vs 60/61s given there's a solid chance the 61s are tapped in Sep/Oct. In addition, we'll be getting a LOT of 2050s over the next few months and at this level on the curve AND RSIs overdone, these 54s look ripe for a 1.0-1.5bps correction of this move.

 

 

• 0E23s tap on Wednesday am. They started off cheap but they're not anymore. Their yield is -10.7bps this am and they've richened back to within a blip of their richest sprd to SONIA at -4.4bps. This issue's dominated by CB/SWF and money mkt players and will go without a hitch.

 

• Wed at 11:30am we'll get a £2.75bn tap of the 1F28s, £250mm less than expected as the DMO decreased the size. Lots of competition for attention in their sector (see my note from last week detailing this) but with a solid repo bid, more than ample room under the 70% APF limit of around £7bn notional and ok carry and roll, we'd expect this issue to trade ok on the curve coming out of this tap. While we remain stalwart fans of the 0E28s on a medium/longer term basis (1Q27-0E28-1F28 fly still around +10.6bps), the 0E28s are still a couple taps away from complete normalization on the curve. ALSO, remember how we thought the 0S29s were looking a tad shaky as their richening momentum ran out of steam? Well, even with a tap of the 1F28s two days away, the 1F28-0S29 Z-sprd box has steepened a basis point (2.5 to 3.5) and looks to have further steepening to come, especially since the 29s eligibility is near rock bottom and won't be replenished until Aug 19^th.

 

UKT 0F25-1F28-4T30 fly

 

     

 

More to come…

 

Mark

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

GILTS... 0E28s Tap at 10am and UKTi 1.25 32s at 11:30

 

• Gilts have settled into a 'groove' of sorts now. The auction calendar, especially since the BoE halved APF support, is providing a more predictable pre/post RV performance for auction bonds, especially seasoned issues. Perfect example being yesterday's 1H26s tap. We highlighted that the ~2bps cheapening vs its neighbours would prompt short covering/buying and by day's end we'd erased at least 1/2 the auction concession.

• It may be a little early to confidently predict the same 'robotic' behaviour for the new 0E26s and 0E28s (and certainly the 0F50s!) but these issues are being built up at an accelerated pace and won't be the cheap new benchmark for long.

• Today's £3bn tap of the 0E28s is only its second one, taking them to £10-10.75bn (depending on PAOF). We can see from the charts below that the UKT 1Q27-0E28-1F28 fly is almost 2bps cheaper than at its first tap on Jun 24, due largely to the richening of the 27s into this week (1Q27-0E28s almost +8bps again). The first 0E28s tap was sloppy and prompted a post-auction cheapening that proved to be a buying opportunity as we haven't traded cheaper than that since (vs 0F25s for ex).

•  The 0E28-0S29 yield sprd is still around +2.5bps and Z-sprd -2.1bps, due to the 29s' repo bid. Would expect to see 29s longs shift back into these 0E28s this am.

 

 

• We expect the 1Q27s to give back some of their recent strong performance into the tap next week and their APF ineligibility, after which they'll drop into the 3-7yr bucket and should perform well. Takes a deft hand to time this but we like selling 1Q27s into 0E28s this am and look to unwind it at next week's 27s tap.

 

 

• The fly in the ointment? It may not play a part but we're going into this am's tap with the 0E28s at their richest ever yield level. RV guys won't care much but real money and CBs might. Perhaps the cpns/redemption/APF/index support will prove the difference.

 

More to come…

 

Mark

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

 

GILTS... Supply Today

 

> 10am £3bn UKT 1H26s will take the issue to £41bn+, the biggest issue on the curve. They'll become eligible for QE again and could show a bit of the repo value they've flashed the last few months. We've been big fans of the 1Q27s into this week's C&R flows and shift into the 3-7yr APF bucket AND this am's tap. The 1H26-1Q27 Z-sprd has flattened 1.7bps in July and the 0F25-1H26-1Q27 fly is back near its cheapest at -3.4bps. While we still like the 1Q27s med term, they'll be tapped next week and this is the last scheduled tap of the 1H26s until at least Sep. Also, 0E26-1H26 sprd has settled at 3.5bps, its narrowest. Bottom line is the 1H26s aren't cheap but they've cheapened nicely on the curve into this tap and are 'back in play'. Expect to see short covering. (chart below)

 

Lastly, have a look at the 1H26-1Q27-0E28 fly – richened very nicely with both wings tapped this week. We've been harping on about the 1Q27s so it's nice to see them performing well into this week's cpn flows and 26/28s supply. We can see from the chart below that this fly has gone from around -.2 to -2.75bps which is a big move for this fly and with both wings cheapening into their taps this week we're inclined to sell the 27s on this fly here.

 

> 11:30am £2.25bn tap of the 0F50s comes with the issue at its cheapest since issued,  under pressure in the recent steepening move. At just £11.8bn, we'll see a lot more taps of these 0F50s (next one Aug 18th) so a bit early to load up the boat. That said, cash flow dynamics (lots of coupon flows and index extensions into longs this week) and the recent cheapening vs 49s and 52s (chart below) will likely attract some short covering.

 

APF resumes today which should help with managing this am's risk.

 

Beyond that, 15yr sector came under some pressure following the DMO's announcement of the 15yr syndication. Still like this sector and TBH, seems a tad early to start beating up 36s and 37s given it won't happen until early Sep at the earliest... (chart below)

 

 

 

 

 

More to come…

 

Mark

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

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GILTS > Quick RV Update

 

• DMO consultations back in March are what brought about taps of the 4T30s, 4Q32s and 4H34s in the Apr-Jul calendar released in late March. So, while we didn't get the rumoured 2035 syndication (maybe Sep-Nov?), an easier solution, given feedback, would be additional taps of the 34s, 36s, 37s, et al. This would be in line with the Solvency II reviews and the expectation of more liability matching further down the curve. Combine this with a tap of the 4H34s on Thursday and we're happy to fade any re-richening of this sector, at least between now and Thurs.

• The 0E28s have traded well on balance since they were first auctioned, holding in nicely on the curve vs 1Q27s and 1F28s. That said, the 1Q27-0E28 sprd has grinded a bit steeper in both yield and z-sprd terms since the MPC's APF adjustment on Jun 18^th bear-steepened the curve. Medium-term, we remain buyers of the 0E28s given the accelerated pace of issuance of new benchmarks means less time in the cheap 'gestation' stage and a quicker normalization process on the curve. We're keeping an eye on these 0E28s into Wednesday AM's tap for a chance to either add to our long 0E28 vs 1Q27 and 1F28 fly OR, our short 0S29s vs 0E28/0R30s fly given recent re-richening of the 29s and their proximity to the BoE's 70% eligibility threshold.

 

 

 

• Broadly speaking – as highlighted in my attached note – we're heading into a month/qtr-end where equities into bonds AND fairly sizeable rates index extensions provide ample fodder for curve flattening trades. This am's DMO announcement didn't include any supply landmines, opening the door for a continuation of the flattening moves we saw into the end of last week. Wednesday's tap of the new 0F50s suggests a bit of caution makes sense but as we can see from today's action, you don't have to extend that far to make money in the flattener today. We're not getting married to these flatteners, however, as they are clearly event-driven so be mindful of location and timing.

 

Today's yields – change on day:

 

UKT 29-49s sprd vs FTSE 100 index

 

G U0 is sitting on Key Short/Med term trendline support as the pennant formation shows we're running out of room against previous resistance. If we surrender this support we're looking at a quick 60 cent pullback…

 

More soon…

 

Mark        

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

• The UK Debt Management Office has given us an outline of their auction plans for the back end of July and a loose framework for August. Here are some bullet points:

 

• April-August will raise a 'minimum of £275bn' via 33 auctions from July to August (sticking with the 2 auctions a day, twice a week calendar). Given the turbulent nature of the UK's fiscal outlook, it's prudent for the DMO to be taking a cautious approach here, especially with stories in the press of new highs in Covid-19 cases in the US.

 

• As of last Friday, the DMO raised £181.25bn via gilts sales which leaves £93.75bn for Jul-Aug. The schedule was for £238.5bn from Apr-Jul so the extension to £275bn by end of Aug means £36.5bn expected in Aug alone which is roughly in line with estimates. If we take into account the UKT 2 7/20 redemption (~£32.5bn), net supply dips to £61.25bn which matches up remarkably well with Jul-Aug QE of £62.1bn.   

 

• NO Syndications announced for the Jul-Aug period although the DMO has asked for feedback on mini-tenders... There was a lot of chatter last week about a new syndicated 2035 issue which is off the table for now.  

 

• The completed Jul-Aug calendar will be announced this Friday, Jul 3rd, at 7:30am after consultations held with the market today and tomorrow. There will be one, universal (GEMMs and investors) call at 15:30 BST TODAY. The Sep-Nov calendar will be released at the end of July.

 

• From a trading standpoint, the announcement that there will be NO syndications in Jul-Aug (perhaps a couple mini-tenders) is generally bullish for gilts as one could argue there won't be any big duration events to deal with, especially in the summer months when volumes/flows often slow. It also suggests less pressure on long-rates AND a better WAM match of supply and APF.

 

• From DMO1:

"In order to provide market participants with an opportunity to raise questions about today's announcement and the financing remit more generally, the DMO is also inviting all GEMMs and investors to participate in a conference call  at 3:30pm today (Monday 29 June 2020) at which the DMO will outline its proposed financing plans for July and August. If you would like to participate in the  conference call, please contact <PA.Mail@dmo.gov.uk>; by midday on Monday 29 June

2020. Dial-in details will be emailed to attendees in advance of the call. "     

 

• Modest BEAR flattening of the curve thus far in reaction to the announcement:
  

 

More to come.

 

Mark

 

 

 

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

Bonds, Equities and Index Flows into M/E

• There's a LOT of talk out there of balanced funds selling equities to move back into bonds at month/qtr-end given the sharp rally in stocks we've seen this month/qtr. GS estimates the flow could be worth $45bn in the US alone.

 

• The stocks into bonds estimates are supportive for UK & Eur rates too, which should provide further bull-flattening to curves into Tuesday. With little rates supply scheduled from now until Tuesday pm (DBR 7yrs and intermediate BTPS on Tues) and more APF/PEPP flows on tap, it's tough to be short the mkt outright with any confidence right now. The 109bps level in UST 5-30s appears to be a key medium/term support which could take an uncharacteristic flattening turn even if stocks stabilize between now and Tuesday (chart).  DBR 10-30s is closing out the week with a nice flattening move back to s/term supports around the 42.5bps level. And finally, the remarkable post-MPC meeting steepening we saw last Thursday to Monday merely provided the market with a nice opportunity to re-load flatteners at the top of the long-term bull flattening channel. (Chart)

• For the UK, there are substantial month-end index extensions (for those who don't follow FTSE index guidelines). However, the wild-card is the DMO's remit which will be published at 7:30am Monday. We'll get the supply calendar for the 2nd half of July and the Aug-Oct period (expected). Frankly, the UK government knows as much as we do about how much more fiscal support the UK economy will need as we head into the autumn and Brexit plans gather steam. So, the DMO's remit is likely to be in a similar vein as the Apr-Jul one we got in March, covering as much detail as they feel confident providing.

 

• Estimates vary on the size and duration of UK supply although the one consensus is that there will be a deceleration from the torrid Apr-Jul issuance we've seen. The unprecedented 3-month supply deluge has already brought us a new 3yr, 5yr, 7yr, 10yr (syndication), 30yr (syndication) and 40yr (syndication), not to mention a myriad of taps of existing conventionals. So, it seems that we're unlikely to get another syndication (aside from a rumoured new 15yr) and the pace of gross/net issuance will moderate. This will likely keep align the supply calendar better to the revised APF purchases schedule announced last week. At this point, we're all watching the OBR's estimates of growth and funding needs which will fluctuate with the success (or failure) of lockdown-unwind efforts – hence the uncertainty. Again, estimates vary but the consensus is for around £120bn gross issuance from Jul-Sep or £90bn Aug-Oct. Anything much higher or lower than that will generate a curve response, complicated somewhat by month/qtr-end scenarios.

 

• How to play it? Well, if you've been enjoying the bull-flattening move this week and have profits in the trade, it's worth considering lightening up a bit into today's close, purely because the DMO announcement is at 7:30am and by the time the market opens, G U0 and/or UKT 29-49s will have already repriced.  We'll be back with more as the day progresses…

 

Charts:

 

 

 

Best,

 

Mark

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

GILTs... FRONT-END Charts

 

• "In the land of the blind, a one eyed-man is king". Or perhaps, better yet, "Beggars can't be choosers." With yields at/through zero a bit of ingenuity is key.

 

• The front-end of the SONIA curve remains at its richest ever levels, a reflection of the MPC's declaration that short rates are staying short for a LONG time. That's left most of the gilts from 22s to 28s at or sub-zero yields, even with the MPC still only 'considering' negative base rates. 

 

• With supply in the front-end larger in notional terms than the rest of the curve (as of last week shorts saw £61.2bn issuance, mediums £50.6bn and longs £46.9bn with syndications), GEMMS are very sensitive about balance sheet usage during the auction process, especially if they are left wearing short paper trading at sub-zero yields and, in many cases, with repo bids at GC levels.

 

• Today's £3.25bn 2T24s tap is a good example. At the 111.32 average price they yield -.04% but their repo bid  is likely to be 10bps cheap to that level and with no APF until tomorrow, they'll need to manage a position that the 2.01 b/c suggests there was little demand for. This helps explain why the 0E26s struggled yesterday and are cheaper this morning. They are a relatively new issue that will find support – because they're one of few issues at a positive yield – but until the GEMMs are rid of their auction longs the issue will languish. Despite the fact that the 225s, 1H26s and 1F28s repo is at best 10-15bps through GC, it's enough to help mitigate the costs of a long which helps explain why the 225-0E26-1H26 fly has cheapened back to =14.8bps. We're still not back to the cheapest levels in these 0E26s – and the rally in SONIA says we're not supposed to – but the post-auction 'cleansing' process of the GEMMs books is going to take longer than it did over the last 6 weeks. 

 

Charts:

 

UKT 225-1Q27-1F28 fly vs 3y2y SONIA

 

OF25-0E26 sprd is about 2bps too steep if we use the 3y2y SONIA level as a guide. Some of that is the new issue concession which will remain for a month+ but the cheapening from +3.75bps since last Wednesday is also a reflection of the post-MPC meeting's shift in APF expectations. We think the 0E26s are cheap here but the market's still trying to get used to the new QE dynamics and they could stay that way for a while.

 

 

The SONIA 5y2y chart looks very similar to the 3y2y above – pinned to the bottom of it's range. Interestingly, the recent cheapening of the 1Q27s on the curve has not been matched by the new 0E28s yet. The chart below is of the 1Q27-0E28-1F28 fly vs 5y2y SONIA. The fly has a modest flattening bias given its 6.4 vs 2.8 wings which could leave the 0E28s vulnerable in a sell-off, however, they've held in well thus far. With a tap of the 0E28s scheduled for next Wednesday Jul 1^st, we could see the 0E28s cheapen up a bit on the curve unless the Jun 29^th DMO supply announcement comes with a reduction in auction sizes for July and beyond.

 

 

Lastly, 0E28 – 0S29 – 0R30 fly remains rich but over the next month should cheapen as both wings become larger and the 0S29s run out of room under the 70% APF limit. As of last night's operation there were just £4.06bn left vs £10.1bn (and climbing) of the 0R30s.

 

0S29s in the box with 0E28s and 0R30s circled.

 

More to come….

 

Mark

 

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission's Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796