Demand for USTs by Central Banks and Real Money. Gilts bid on strong syndicate
ITC Fixed Income Morning Recap:
- USTs in Tokyo/London: USTs opened lower in Tokyo- catch up with Bunds yesterday. There were some early dip buyers, accounts picking away at the low end of the recent range. As the Eurgroup news hit the wires, USTs were hit lower and Eur spiked. The belly led the move lower, but the sell-off was met by further dip buyers in 10s by Asian Central Bank The market has since firmed up off thir lows, also aided by the reversal in the Eur. London has seen more of the same- lots of extensions out of 2yr to 3yr, good Asian buyer of CT7s and general RM short-covering/establishing longs. US 141.20 -15, TY 130.20+ -9, FV 123.05 1/4 -4 1/4, TU 110.06 3/4 -1/4, SP 1363.50 +3.60, Eur 1.3234 -5.
- US Supply: Today, the Treasury is scheduled to auction $35bn in 2s. Auction statistics show steady demand for the sector. The bid-cover ratio remains comfortably above the previous 12m average. At the same time, only one of the previous six auctions has tailed and that too not by much – the January auction tailed by 0.25bp. This is not surprising, given the low realized volatility at the 2y tenor.
- US Supply this week: The Treasury will auction new 2y, 5y and 7y notes for a combined $99bn. Net cash-flow for the week is negative with no coupons or redemptions due, though we do note large cash-flows on the settlement date of this week’s auction of$66.4bn (Coupons $4.64bn and Redemptions $61.72bn) . As part of Operation Twist, the Fed will purchase up to $4.0bn in the 24-30y sector, and sell up to $8.5bn in both the 0.8-1.3y and 2.2-3y sectors.
- US Fed Ops: Today, the Fed is scheduled to sell $8-8.75bn in Dec12-May13 sector. The Fed’s largest holdings in this sector are 1.75% April13s and 1.375% Feb13s.
- European Fixed Income: Bunds opened lower to the Greek news but have been underpinned by the leaked Troika report. Equities are weak as a result. Eur reverse their gains. Swapped issuance are also underpinning. Gilt syndicate book went well- and have Gilts bid. As for flows today, there’s been decent bank selling of 2yr France, good buying 5yr AAA by European real money.
- Euribor Opts: Quiet start with focus on March downside. There have been no large trades as of yet, but the theme this morning has been downside in March (expiry in 27 days). Paper bought 2k Mar12 99.00 Put for 1 tick, Paper bought 5k Mar12 98.75 Put for 0.25 tick, Paper sold 4.5k Mar12 98.87/99.00/99.12/99.25 Call Condor at 10 ticks Paper also bought 1k Sep12 99.25/99.12/99.00/98.87 Put Condor for 2.5 tick
- Eur Swaps: SocGen 5yr (MS +225 area), Danske 5yr (MS +235 area), FGA 5yr, Securitas 5yr (MS+125), Thyssenkrup 5yr (MS+300a)
- Gilts: Good demand for the syndicated 0.375% 2062 index- linked gilt. Book closed, but allocations later. Futures bid as the long-end leads the charge higher- assuming linker related. Gilts have also seen good Central Bank buying of the short-end and good domestic buying of 10yr. Generally, dealers think the book size is pretty much in line with expectations.
- Short Sterling: 10k Dec12/Mar13 Spreads sold at 0.01. This is the most active spread this morning with 2k bought at 0.02 earlier. Total volume is 14k, 20% above the 5 day average.
ITC on European Swaps- could be a volatile few weeks with PSI hedging flows. With the restructuring of the Greek debt conditions finalised via the PSI, banks that have held these securities in their bank books as asset swaps may now be forced to unwind these positions. This would result in financial institutions RECeiving in swaps with maturity corresponding to the maturity of the Greek bond debt held in their books. A lot of these PSI unwinds have already taken place, but the big question is how much is left to be done. They also may want to re-enter the hedge in the new bond. However the question is how many can swap a 5y exposure (say) with 30y. Their fund’s constitution might not allow it