RBC: Re-entering 5y ASW Shorts On 5s30s ASW Box

RBC write “with month-end now behind us, we like re-entering into our structural 5y ASW short position on the 5s30s ASW box, setting a take profit target of -55bp and stop loss of -86bp.”

• “We expect the DMO to keep the average maturity of gilt issuance towards historic lows for the foreseeable future - with the minutes of the recent DMO annual consultation meetings with GEMMs and investors showing both parties calling for a proportionate reduction in long gilt supply and linker supply, and more short and medium gilt issuance.”
• “To this point, the skewing of DMO gilt issuance has been the single best predictor of relative 30y ASW performance on the 10s30s ASW box and suggests 30y ASWs have another 15bp of outperformance to go to reflect the recent skew shorter in issuance from the DMO.”
• “Additionally, we anticipate 5y ASWs continuing to lead the cheapening in ASWs across the curve given our view that repo specialness will continue to normalise.”
• “The 4 weeks of consecutive 30y gilt supply is coming to an end today.”
• “What is also interesting is that 30y ASWs failed to cheapen on the 10s30s ASW box into this recent supply - which adds more confidence to our structural 30y ASW long view.”
• “Why not just a 5y ASW short? We already have a structural short 10y Bund ASW position in our portfolio and hence prefer this relative ASW trade in the UK to diversify our ASW exposure.”