BTP: Further Tightening In Spreads Unlikely Without EU-US Trade Progress

DBK (20th June) 19c, bought for 1.17 in 9k.

Gilt swap spreads are little changed to lower, proving a more sensitive to moves in U.S. peers than the German equivalents.

• 2-Year swap spreads widened in early trade, but have quickly faded towards late Wednesday levels, as the dovish move in the front end of the SONIA strip is fully accounted for on both sides of the spread and with 2-Year yields off session lows.
• Further out the curve, swap spreads are ~0.5-1.5bp lower vs. late Wednesday levels, but off early session lows, roughly replicating moves in outright bonds.

• The DMO will return to the market this morning with GBP4.5bln of the 5-year 4.375% Mar-30 gilt on offer.
• This will be the fourth auction of the gilt, but marks an increase in auction size from the GBP4.25bln seen for short-dated gilts recently.
• Given market conditions and the larger auction size there might be a larger concession than usual this morning. We also note that large concession ahead of the 30-year gilt auction yesterday (followed by a 25 tick rally in gilt futures on the publication of the strong results).
• Bid-to-covers have ranged from 3.00-3.39x (albeit with slightly smaller auction sizes).
• The past couple of auctions have seen the lowest accepted price come very close to the pre-auction mid-price.
• There are two further 4.375% Mar-30 gilt auctions scheduled in FQ1 (7 May and 17 June).
• Timing: Results will be available shortly after the bidding window closes at 10:00BST with a further GBP1.125bln available to successful bidders through the PAOF.