EU RATES ROUNDUP: Staying Short Bund; Focus on Praet Comments
(Bloomberg) -- Bearish bias is maintained; NatWest Markets and Deutsche Bank continue to advocate short 10y bund, Citigroup see scope for further weakness into ECB but look to buy ~0.65%.
- Lots of focus on comments from ECB’s Praet, which point to a lower for longer bias on QE purchases; Barclays believe this supports their existing reds/greens EONIA steepener view, while Citigroup add 1x2 costless receiver spreads in 3y1y
- Spain has gained attention given the risks around Catalonia independence, NatWest Markets like fading and recommend long 10y Spain vs Germany, Citigroup don’t expect recent ranges in this spread to break, BofAML close short Spain vs OAT, while Deutsche Bank see Spain as rich to fundamentals
Barclays (strategists including Cagdas Aksu)
- Comments from ECB’s Praet on Oct. 2 indicate more openness towards a longer extension of asset purchases at a slower pace
- Slower and longer QE extension would be good for currently held reds/greens EONIA steepener as it keeps reds underpinned, though should mean more term premium further out the curve
- This policy move is also somewhat less dovish side in terms of cumulative and front-loading of purchases; this should result in tightening of German ASW and marginal widening in EGB spreads; continue to hold short 10y Netherlands vs EONIA
NatWest Markets (strategists including Andrew Roberts)
- Global PMIs are all out and indicate world economy is doing well, with Europe at the top of the pile
- Maintain short 10y bunds as fair value model shows they should be trading around 0.85%; set a conservative target of 0.65%
- In Spain, have preferred being long Spain and bar to re-enter is low; the recent widening has been driven by the difficulty in appraising the seriousness of the separatist threat
- Recommend going long 10y Spain vs Germany, at a spread of 123bps, target 103bps, stop 133bps
- In the U.K., stay bearish 10y to 1.80%, and hold 10s30s flatteners; 5y5y GBP swaps fair value is over 2% and currently remains suppressed as some "no deal" risk is priced in; political uncertainty is more of a currency story than for rates
Citigroup (strategist including Harvinder Sian)
- Main thrust of Praet’s speech was to reinforce the powerful effect of the sequencing guidance on asset purchases
- ECB doves have been most vocal; recall the options discussed in Sept. were net buying of EU20b or EU40b over 6 or 9 months; markets are pricing closer to a 12-month extension
- Remain bearish duration into ECB announcements, but don’t expect a violent reaction; look to buy bunds nearer 0.65%, this plays out mainly as a forward steepener
- Spain spreads remain vulnerable as regional elections are looking likely, but continue to expect the 12- month range vs bunds to hold
- Have only preferred short front-end rates tactically given the high cost of carry and roll; expect a forthcoming defense of rate sequencing from the ECB and look to get long via swaptions, prefer zero cost 3y1y 1x2 receiver spread with strikes ATMF/-36bps
Morgan Stanley (strategists including Elaine Lin)
- Praet’s speech shows a bias towards slower path for policy renormalization, lower QE pace with longer time horizon
- Duration and collateral in bund markets will continue to be absorbed by the ECB; the stock effect of QE will keep term premium well anchored, continue to recommend owning 10y Bund vs swap
- In the U.K., ahead of Nov. MPC, close out March 2018/March 2019 short sterling steepeners as now think current pricing is consistent with a gradual and limited cycle
- ECB QE should continue to provide support for spreads, and Spain risk remains idiosyncratic; still like holding onto Italy 5s30s steepener, as an attractive carry trade that should also perform well if the ECB turns out to be more hawkish than expected
Deutsche Bank (strategists including Francis Yared)
- Maintain short 10Y bund initiated last week, Germany 5s30s flatteners vs eonia and short 5Y France vs. Germany (67%) and Italy
- Spain has underperformed as attention has focused on Catalonia, however continues to trade relatively rich to fundamentals and is particularly vulnerable to ECB QE taper given elevated foreign ownership
- With the Italian curve locally steep to Spain; exit 5s15s BTP steepeners and rotate into Spain 5s15s steepeners vs Portugal
BofAML (strategists including Sphia Salim)
- EUR swap 10s30s curve sits around steepest levels since Dec. 2014; the move is justified by fundamentals leaving room for a break higher because of either structural paying flows, tax reform prospects or fading geopolitical risks
- Recommend entering 10s30s conditional bear steepeners, via buying EU39.4m in 3m30y ATM+0.5bps payers vs EU100m selling ATM 3m10y payers
- Close short 10y Spain vs OAT as Spanish political risks have turned more balanced and market continues to remain in buy the dip mentality in SPGBs, as was seen in the successful auction last week
To contact the reporter on this story: Stephen Spratt in London at sspratt3@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Scott Hamilton
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Elaine Lin (Morgan Stanley)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
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