RBC: ACGB Nov-31 Launch: 1% Coupon Fair Value At 10y EFP+8.75bp

RBC note that "the AOFM today launched a new 1% 21-Nov-2031 nominal bond at an EFP range of 8-11bp over the implied bid yield on 10y futures. We assessed last week that fair value was around EFP+9bp. The slightly higher at launch coupon (1% vs our assumption of 0.75%) following some curve steepening lead us to bring in our assessment of fair value marginally to EFP+8.75bp. This is currently equivalent to a yield of 1.0025%, ASW of 16bp, and a y/y spread over Jun-31s of 3.5bp. We would expect the deal to have some new issue concession given it's to be of benchmark size, so we think it should price around EFP+9.5bp. It could be argued that fair value is closer to EFP+8bp using a straight-line interpolation between Jun-31 and May-32s, but we think the May-32s are a little rich on the curve, and so below EFP+9bp we would rather hold the Jun-31s or Apr-33s. Pricing the new bond at EFP+8.75bp gives it almost-equivalent roll-down characteristics to the Jun-31s, and better than the May-32s. We also note that 10y basket basis is also only slightly cheap, also leaving us unwilling to hold the new bond without some concession. The back-up in outright yields and slightly steeper curve over the past few days should help with demand however. Finally, repeating our previous analysis, given this is a fairly standard 10y area bond, we would not be surprised if the AOFM reached the $20bn mark for the first time. Conversely, we would be very surprised if the deal was less than $15bn in size. Syndication sizes so far this financial year have been $19bn (Dec-30s), $17bn (Nov-25s) and $15bn (Jun-51s)."