EU RATES ROUNDUP: Steepener Bias Remain, Turning Bearish Gilts
(Bloomberg) -- The consensus steepener view on European rates remains intact; duration views are mixed in Europe, NatWest Markets turn long bund futures, while the bearish bias on U.K. rates continues to grow, with Morgan Stanley recommending new shorts in 10y gilt futures.
- NatWest Markets (strategists including Andrew Roberts)
- Trading U.S. rates from short side and European rates from steepening side, e.g. 5s30s in markets which lengthen duration; continue to like 10s30s France steepener boxed with Germany, especially if Japanese sponsorship changes
- With 5y OATs offering a positive pick-up to JGBs and 10y OATs offering as much as 87bp, the case for extension is much less compelling, adding to ECB- induced steepening pressures to semi-core curves
- Supply has been taken down with surprising confidence and while strong data have pushed expectations higher, this has not impacted on yields, with the ECB firm on guidance, turn cautiously long on bunds
- Buy bund futures at 162.50; target 164, the 76.4% retracement of the down move between the high/low marked in the two defining risk events of late 2016, the U.S. election and the ECB
- In the U.K., headline and core CPI have surprised to the upside, QE buybacks unlikely to be extended, should require higher term premium; bearish sentiment is rising, time to add to bearish trades, enter an outright short, paying GBP 5Y5Y
- Morgan Stanley (strategists including Anton Heese)
- Indicators turned bearish on Bunds in the past week, driven by shift in momentum, moving from rangebound yields at the start of the year to a selloff in the past week, led by economic data and the U.S. cross-market
- The bearish signal for duration would support the currently recommended 5s30s Bund steepener, as the curve bear steepens in a selloff
- Remain of the view that the impact of the ECB QE changes and economic outlook will have an ambiguous impact on duration while the more clear impact is to steepen, in particular 5s30s
- Go short 10y gilts via futures, as a short-term tactical recommendation in response to the better-than-expected growth and inflation data, as well as supply pressures
- Deutsche Bank (strategists including Francis Yared)
- Latest ECB guidance on purchases below depo floor indicate that reduction in duration of purchases might happen more slowly than some might have expected
- This, plus the potential for ESM-related paying in swaps to reduce the interest-rate risk for Greece, suggests rotating 30Y Bund ASW tightener into 10Y Bunds ASW
- On same rationale, also recommend rotating 10s30s steepener in Netherlands into EUR swaps
- Stronger-than-expected inflation and resilient wage data this week have supported a sharp steepening of the U.K. money market curve; higher realized inflation prints will put growing pressure on the MPC to turn more hawkish
- In terms of trades, maintain short 30Y Gilts as the long end remains rich on both a curve and cross-market basis, while evidence of concession into the planned 40-year syndication is mixed
- JPMorgan (strategists including Fabio Bassi)
- ECB unlikely to be a bearish catalyst in the near term, supply pressures should last longer; maintain bullish front- end exposure via long 2Y Schatz, receiving greens EONIA; continue to hold short in 10Y Bunds vs USTs
- Hold bearish duration proxies via 10s30s steepeners in Germany, enter 2Y2Y/15Y15Y EUR swap curve steepener, and take profit on greens/15Y steepeners
- In EGB spreads, favorite trades are short 10Y+ Netherlands vs Germany, short 10Y France vs Germany, short 7Y France vs Belgium
- Eonia market prices first 10-12bps hikes from ECB by end of 2018, and ~30bps of hikes by end of 2019: see front end as cheap and keep receiving greens Eonia
- In the U.K., think further details on negotiating plans for Brexit will be limited, market focus will shift away in short term; maintain short 10y gilts and 10s30s gilt steepeners, 30s50s gilt flattening bias post upcoming syndicated supply
- BofAML (strategists including Ralf Preusser)
- Maintain a bearish steepening bias on European rates, and stay constructive on 5y with purchases below depo rate at national central banks’ discretion
- After latest ECB comments on depo floor, see no reason to change the view that weighted-average maturity of German QE purchases will decline materially over the coming weeks
- This will support 5y valuations on the curve and apply steepening pressure
- The “priority” for assets yielding more than the depo rate could imply average maturities remain higher for now, with a sharper cliff in April
- Expect gilts to suffer after BOE QE ends, with the potential for an exit bill from the EU, which leaves OBR forecasts vulnerable and therefore upside risks to the supply outlook for gilts
- Citigroup (strategists including Harvinder Sian)
- Recent flush out of short positions gives scope for new reflation trades, but Bunds should remain supported by flat-lining core HICP
- The ECB is content to avoid deflation, which makes forward breakevens a sell
- With the ECB on hold for now, the return of supply, to some extent politics and spread curve steepening are key drivers
- PSPP priority above the depo rate infers a skew to ECB buying in the belly
- While the 33% issuer limit is a big deal, this can be currently traded in Ireland and Portugal, where new issues should richen vs surrounding bonds, supported by QE buying (after the black-out period around supply is over)
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
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