RBC: ACGB Dec-34s RV Refresh Post-Launch

RBC write “the AOFM today launched the new Dec-34 at an EFP range of 8.5-11.5bp, exactly in line with the range we published in our initial RV piece on Friday. However, two factors have led us to tighten (slightly) our prior EFP+9bp FV assessment.”

• “EFPs for nearby bonds have tightened since Friday.”
• “The selloff in fixed income since Friday has prompted the AOFM to use a 3.50% coupon rather than the 3.25% we initially assumed, which brings down the duration of the bond and thus demands about 0.4bp less in yield/spread terms.”
• “The net effect is that we lower our fair value estimate to ~EFP+8.75-9bp. So, in our view, EFP+9bp or above represents a decent new issue concession (NIC). At the 8.5bp lower bound of the launch range, there’s less potential NIC-based performance but given the whole curve around here is quite steep, it could still subsequently tighten. Under that scenario though, May-34s or Jun-35s might be equally attractive options to take advantage of potential 10-12s curve flattening.”