Fixed Income Analysis /
Global

Primary Market Focus - We prefer RAGB Feb32 to RAGB Feb47

    UniCredit
    1 April 2022
    Published byUniCredit
    • On Tuesday, Austria will sell up to EUR 1,495mn of RAGB 0.9% Feb32 and RAGB 1.5% Feb47. The supply picture is favorable for Austrian govies, as its debt agency is well advanced in terms of 2022 funding goals, and three bonds will mature in the remainder of the year. This, together with still-solid strong macroeconomic fundamentals, should bode well for RAGBs, especially compared to Bunds and OATs.
    • The recently issued RAGB 0.9% Feb32 looks appealing in relative-value terms and is likely to outperform longer-dated bonds if yields stabilize. On the other hand, we like RAGB 1.5% Feb47 relative to RAGB 0.75% Mar51. However, we regard the 30Y bucket of the Austrian curve as expensive. On Tuesday, Austria will reopen RAGB 0.9% Feb32 and RAGB 1.5% Feb47 for an overall amount of EUR 1,495mn. This auction will come only two weeks after the syndicated issuance of RAGB Feb32. So far this year, the Austrian Treasury has sold EUR 15bn of bonds, which represent 38% of the RAGB issuance target announced at the end of last year (EUR 40bn). Austria is well advanced in terms of its funding goals compared to both the eurozone average (30%) and compared to how much progress it had made by this time last year (23%). Furthermore, the net RAGB supply expected for the remainder of the year is nil in light of EUR 26bn in redemptions. Hawkish ECB rhetoric and ongoing inflationary pressure pushed EGB yields higher in March, with the 10Y RAGB yield (BFV series) rising by 50bp to around 1%, its highest level since September 2015. After reaching 45bp at the beginning of March (a period characterized by flight-to-liquidity), the 10Y RAGB-Bund spread (BFV series) has recently tightened back to below 40bp. In our view, if the upward trend in EGB yields comes to an end, and if fixed income markets stabilize at these or lower levels, the 10Y RAGB-Bund spread is likely to tighten further in the 30-35bp area. In the past few weeks, Austrian govies have also outperformed OATs, with the 10Y RAGB-OAT spread going back into negative territory. Since Austria’s macroeconomic fundamentals are more solid than those of France, we expect RAGBs to continue to outperform OATs in the coming months. The favorable supply picture could favor RAGB outperformance of Bunds and OATs in the remainder of the year.