RBC's Outlook For The Rolls

RBC note that "roll activity has been limited thus far, but we expect this to pick up markedly from Tuesday night when futures move to half-tick bid/offer. Given the Australian public holiday on Monday 14 June, we also expect most activity to take place on Wednesday-Friday of this week. The 3-Year, 5-Year and 10-Year futures all change in composition between the Jun and Sep contracts. In the 3-Year, the removal of Apr-23s and addition of Nov-25s should help lessen YCC distortions to the basket, with only 1/4 bonds (the Apr-24s) now pegged down by YCC rather than 2/4. Given the way the June roll went further right quite late, plus our view that yields are more likely to head higher than lower from here, we're of the view that rolls can probably shift slightly further right from here. Basket compositional shifts, steep curve shapes and futures "cheapness" relative to physical bonds are all combining in this roll to make for a large set of optical shifts. In swap spreads, our bias is to use TFF-driven narrowing after the roll to re-enter paid 3-Year EFP positions at somewhat narrower levels referencing the new Sep futures contract. We note that September 10-Year basis is starting to looking a touch negative, with implied repo rates heading lower (-0.18% at present). This could be a sign of growing tightness in some 10-Year bond lines, possibly as a result of ongoing QE taking stock out of the market and a lower AOFM funding task."