RBC: New ACGB May-34s Look Cheap At EFP+8bp

RBC write “new ACGB May-34s look cheap at EFP+8bp.”

• “We suspect balance sheets will form a larger than usual proportion of the book given ongoing CLF transformation into HQLA. With 10y basket basis slightly positive, the carry is at least slightly better than on ES balances, even if not as good as on longer-dated semis.”
• “The largest previous balance sheet split on a new 10-12 year bond was 35.5% of the Nov-28s (in Feb-17). The two most recent 10yr bonds (Nov-32s, Nov-33s) have seen balance sheets form around 21% of the book. We suspect this deal could lean closer to the former than the latter.”
• “The 3.75% coupon on the new May-34s is driving an optically rich looking ASW versus surrounding bonds which have lower coupons.”
• “We don’t think this is the right way to look at fair value - versus swap, z-spread is a better measure (and on this metric it looks optically cheap). But we wonder if ASW interest or at least ASW being used as an RV tool is leading some to demand a greater concession from the AOFM.”