On Thursday at 09:50 BST, France will auction €8.0 – 9.0bn OATs: 10y Nov28, 16y May34, 30y May48 (equivalent to ~RX 105k futs)
France is selling a slightly elevated €8-9bn mainly because waiting in the wings is the exceptionally large redemption and coupon payment on Oct 25. A large chunk of the €28bn redemption (coupons do not get reinvested) will be held within the PSPP portfolio and so will need to be reinvested by the ECB back into the French market in the two month period after the redemption. Such a flow (potentially €9bn) could be invested anywhere along the French curve. With a favourable spread to core Europe, the auction should go well. With the market also quite unstable, there is particularly good value in the smaller secondary auction for dealers.
The choice of 10/15/30y maturities for the auction is in line with expectations.
Yields have certainly risen since the summer months as the ECB has become more hawkish and the market continues to price in a first rate hike in Q4 2019. The 10y OAT yields 0.80%, about 10-15bp more than July-August yield levels.
French debt has underperformed Germany during the recent BTP spread widening. There is now a 35bp spread to the 10y German benchmark, which is generous compared to the first half of the year. Alpha-Genesi positioning shows that fast money is short OAT futures.
Cross market valuations should help the OAT auctions considerably and there has continued to be strong inflows into life insurance products since the start of the year. Such flows are closely correlated with economic growth and so they look likely to continue. The other point to make is that the 5-10y box spread to Germany is quite wide i.e. this is the point of the curve where the credit curves diverge significantly.
Z-spreads for EGBS (France = pink, Belgium=Green, Austria=light blue, Germany=blue)
There has been little movement in terms of yield curve slope since July. The chart of the OAT 5-30y spread dipped a little during the renewed pressure on Italian BTPs but at 152bp it is very close to summertime levels.
French 5-30y spread
The main negative to for the 10y is the fairly tight yield spread between the CTD for the OAT Dec-18 contract, OAT 2.75% Oct-27 (see chart below). This might limit a dealer bid.
10y yield spread to the CTD looks quite low
The OAT May-34 is clearly in an expensive part of the yield curve if the Z-spread chart is observed and the 15-20y section of the curve often does trade expensive because of the life insurance flowSource: Bloomberg
French cash flow is positive (est +€24.8bn) in the near term (this week plus 3wks ahead) as the country is set to pay the largest C&Rs (€41.25bn) for EGBs this month on 25th Oct.
- 10y OAT: The last 10y OAT was tapped Sep 06 with a cover ratio of 1.95x (vs. the average of 1.93x seen in the previous 3 auctions), tail of 2cts (vs. the average of 2.33cts seen in the previous 3 auctions) and overbidding of 5cts (vs. the average of 4.57ct seen in the previous 3 auctions)
- 16y OAT: The last 16y OAT was tapped Sep 06 with a cover ratio of 1.6x (vs. the average of 1.98x seen in the previous 3 auctions), tail of 6cts (vs. the average of 6cts seen in the previous 3 auctions) and overbidding of 10cts (vs. the average of 11.33ct seen in the previous 3 auctions)
- 30y OAT: The last 30y OAT was tapped May 03 with a cover ratio of 1.35x (vs. the average of 1.72x seen in the previous 3 auctions), tail of 9cts (vs. the average of 12cts seen in the previous 3 auctions) and overbidding of 10.8cts (vs. the average of 10.93ct seen in the previous 3 auctions)
Previous Auction Stats: 10y, 16y, 30y OATs: