EURIBOR OPTIONS: Call fly buyer

Gilt futures firm in early Monday trade given the rally in Bund & Tsy equivalents since Friday’s gilt close (although do note that the latter is comfortably shy of Asia-Pac highs), before moving back from best levels.

• The contract sits +15 or so at typing, around 98.95, ~20 ticks shy of the peak of its early 28-tick range.
• Friday’s high is unchallenged/intact.
• Cash gilts are 1bp higher to 3bp lower in yield terms, with the curve twist flattening.
• SONIA futures show -2.0 to +2.0 through the blues, with the uptick in gilts providing some support after some pre-gilt open weakness.
• BoE-dated OIS also sees some light receiver-side flow, with ~106.5bp of cuts now priced through ‘24 vs. 104.5bp pre-gilt open.
• Note there will be nothing in the way of APF sales from the BoE today.
• A reminder that the DMO is set to issue a new 30-year 4.375% Jul-54 gilt via syndication at some point this week, we believe that will likely come on Tuesday. The gap in APF sales can probably be explained by the presence of this syndication.
• The highlight of this week’s domestic data docket comes via Wednesday’s flash PMIs.

Late on Friday J.P.Morgan recommended entering a long 5Y Italy CDS cash basis position as an attractive risk-off hedge to their broadly overweight portfolio.

• They noted that “Italian CDS basis has declined sharply over the past few months and is now trading at its tightest levels at least since 2015. The large part of the basis tightening move was driven by the strong decline in Italian CDS spread, currently trading close to tight levels reached during 2021-2022 Draghi government.”
• “The CDS basis is now trading close to flat and we find it hard to see the basis turning negative, i.e. CDS trading below cash ASW.”
• “Also Italian CDS basis has been positively directional with Euro IG credit spreads and is screening around 10bp too tight on the empirical relationship since 2015.”
• “Our colleagues in credit strategy are forecasting modest spread widening over 2024, as valuations at current levels are fully pricing the benign soft landing scenario and do not offer protection against downside macro/geopolitical scenarios.”
• “The long 5Y CDS basis has a modest negative carry. We, therefore, find long 5Y Italy CDS basis as an attractive risk-off hedge. We also flag that the long basis also provides attractive portfolio hedge against something breaking global risk-off episodes, as the basis widened significantly around start of COVID-19 crisis (Mar 2020) and also during 2023 US regional banking crisis (Mar 2023).”