Long Basis on SOAF $bonds

　　The long basis in SOAF bonds strikes us as generallyattractive from a historical perspective, with CDSoutperforming Cash recently.

　　SOAF $ 24, in particular, emerges as one of mostcompelling bonds for a number of reasons (see Charts 1and 2). In terms of entry point, the simple basis in SOAF$ 24 has traded at an attractive level since its issuance inJanuary 2012: c.85% of the historical basis data tradesabove today’s mid-levels, while the 1-year z-score furtherconfirms the attractiveness of the trade.

　　SOAF $ 24 also strikes us as wide compared to adjacentbonds on the curve, notably the curve between SOAF$ 22 against which SOAF $ 24 has widened by c.30bpsince the beginning of February and now stands at anattractive entry level (Chart 3). Against SOAF $ 25, theunderperformance is less clear; nonetheless, thedifferential between SOAF $ 25 and SOAF $ 24 hastightened by c.15bp in the last three months.

　　The underperformance of the SOAF bond, especially atthe longer end, has also been prompted by the expectedSOAF 10-year issuance, which materialised on 7 Aprilwith a $1.25bn 10-year issue. National gross borrowingrequirements for the 2016/2017 year stand atZAR18.9bn ($1.3bn), redemptions at ZAR12.5bn($880mn), although the Treasury had earlier indicatedthat it would be looking to raise $4.5bn in the mediumterm in the foreign market. Having said that, supply tendsto hit the 10y+ bucket, hence further SOAF supply in themedium term should put limited pressure on SOAF $ 24.

　　In terms of directionality, we expect the basis to performwell also in a bearish market, with CDS widening fasterthan Cash. As such, basis trades in SOAF can feature asattractive defensive portfolio trades in the event of apullback in SOAF spreads.