Happy new year, a Brand new 10Y OLO is out !

Characteristics The Belgian Agency is launching today a new 10Y benchmark via syndication , one week earlier than its usual calendar (probably due to the Brexit calendar). The treasury is expected to raise 5 Bn to 6 Bn with this first operation, hence completing nearly 18% of t h is yearly issuance in one shot. Regarding the 10Y su pply this year, we expect about 12Bn of issuance in 2019 with one syndication and 5 to 6 reopenings . The Agency decided to cancel the auction initially scheduled this month which means that we’ll have to wait until March 18 to have the first tap on this OLO 6/2029 . Pricing terms Looking at the grey market, the coupon is likely to be 0.9% or 1% (yield seen around 0.95%). According to first price indications, the new bond would be trading around MS+10bp which looks wide given the current ASW margins of the OLO 6/28 or 6/31 (both bonds are trading around MS+3.8 & MS+7.5bp). The heavy supply and the unfriendly market context are probably explaining a rather large NIP, the fair value of the bond being seen around MS+ 7 . We would not be surprised to have a minor revision of the latest IPT of MS+1 0 bp. Taking those two latest levels into account, the new OLO 6/29 would be offering the following pick ups vs Bund or OAT , so definitely some tightening potential notably if we consider the new bond’s FV : Margin against swap MS+ 7 to MS+10 ; Pick-up vs incoming Bund 2/29 from 6 2 bp to 65bp ; Pick-up vs OAT from 19 bp to 22bp . Note that the roll-down of the new OLO 6/29 is interesting and slightly exceed 1bp / month (14bp to 16bp over 1Y), another illustration of the steepness of the 5Y-10Y segment. Relative value : attractive vs OAT 11/28 & Bund 8/28 , cheap vs swap The bond is definitely quite cheap in relative value terms. Let’s start against France : despite the Yellow Jackets crisis which has been an idiosyncratic risk so far, Belgian OLOs did not manage to outperform OATs. The 10Y spread between the two issuers on the 10Y maturity widened above 10bp and did not benefit at all from the relief seen o n peripheral. At +11bp, the OLO 6/28 looks way to wide, even when we consider the recent political developments in Belgium. At least it should be 3 to 4bp tighter, which of course bodes well for the new OLO 6/29. Adding the nice roll-down of the new Belgian bond and the tap of OAT 11/28 this week (8 to 9bn of long-end supply this Thursday in France) , entering in the OLO 6/29 – OAT 11/28 switch and grabbing about 20 bp is quite appealing . The other obvious trade is against Bund but, once again, one has to keep in mind the Brexit incoming developments. While OLO – OAT spreads are usually range-bound, spreads vs Bund can widen a lot when major risks materialize. As we don’t expect a no-deal Brexit , we believe the 69 b p to 72bp of pick up offered by the new OLO 6/29 vs Bund 8/28 (we see the Bund 8/28-2/29 spread around 7bp) is also quite attractive , even more if we end up with a positive outcome between the UK & the EU. Finally, we have to say a word about the ASW margin, which is now back into positive territory (last time was in early 2017 ahead of French presidential elections) . Even despite the whole year of supply ahead, we feel that the bond is too cheap vs swap and that this spread factors in too many risks. Of course, the trading horizon of such a position exceed 6m. Our target for the margin is set at MS+0bp.