RBC: 30yr Sector Remains The Standout Cheap Sector In The Long End

RBC write “A heavy supply pipeline in 30yr Gilts and I/L for FY Q3, coupled with several long end APF operations over the same period, has seen a significant cheapening in the sector on every metric.”

• “Moreover, the seasonal pattern of structural buyers in September/October did not emerge as yields backed up and the curve steepened, leaving the market to believe there was a buyers strike.”
• “Over the last few sessions, however, we have seen good buying of long dated gilts, on the curve and outright.”
• “On 10s30s50s the 30yr sector is still close to the cheaps and positioning remains short of 30yrs.”
• “With the 20yr syndication in 4 weeks, it may be time to consider switching from the 20yr sector into the cheap 30yr sector.”
• “Historically, the 20yr sector has been the “hump” of the curve, while the current curve now peaks at the 30yr point.”
• “Moreover, on the SONIA curve, the curve is very inverted from 15yr out.”
• “With the DMO switching their supply focus from the 20yr sector to the 30yr sector recently, the 20yr/30yr slope has steepened significantly and is now steep relative to the regression versus 10s30s50s. The regression is high with the exception of the LDI crisis and should see a reversion in the coming weeks.”
• As such, they recommend selling 20yr (UKT 1.25% 41) vs. 30yr (UKT 3.75% 53) at +8bp. Targeting a move to 0bp, with a stop set at +12bp.