EU RATES ROUNDUP: Steepeners Remain in Vogue; ECB a Non-Event
Source: BFW (Bloomberg First Word)
Tickers
2539Z GR (European Central Bank)
People
Cagdas Aksu (Barclays PLC)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
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UUID: 7947283
(Bloomberg) -- Low expectations for this week’s ECB meeting; bias on European rates remains skewed toward steepeners, though outright duration views are more mixed.
Alert: HALISTER1- Barclays (strategists including Cagdas Aksu)
- Continue to find the current euro-area and macro environment conducive to steeper long-end peripheral curves, wider German ASW, EGB spreads; maintain 10s30s steepener in Ireland, long Bund ASW vs EONIA, short 10y Spain and Austria vs Germany
- Don’t foresee any new measures or a change of tone from the ECB next week
- Expect the collateral squeeze in EGBs to continue with more bonds trading special as a consequence of more QE purchases
- DMO plans to issue a new 2057 issue later this month; the low coupon/long duration of the new issue will place Gilt 2060 and 2065 under pressure
- See the Gilt 2060 as rich in RV and recommend shorts into supply on the 2055/2060/2065 gilt butterfly
- Continue to find the current euro-area and macro environment conducive to steeper long-end peripheral curves, wider German ASW, EGB spreads; maintain 10s30s steepener in Ireland, long Bund ASW vs EONIA, short 10y Spain and Austria vs Germany
- Citigroup (strategists including Harvinder Sian)
- Rates have failed to push higher despite better than expected economic data, upside German inflation surprise
- Maintain bullish bias on rates as lots has been priced on the reflation trade and because CNY devaluation is still hanging over markets; inflation data is key to this view and view core HICP as showing no meaningful signs of life
- Reflation scenario in the euro area carries some risks, as the main support to the pick-up in headline inflation so far has originated from energy base effects
- Recommend investors add reflation trades to their rates portfolios via options via EUR 2y fwd 5s30s single look ATMF spread cap, which trades around historically cheap levels (trades around 23.5 cents, ATMF ref: 1.0%)
- See value in owning Bobl/Eonia ASW given the expectation for general collateral to richen and as the ECB will begin to buy below the depo rate on Jan. 13, after a change in legal documentation
- Rates have failed to push higher despite better than expected economic data, upside German inflation surprise
- Deutsche Bank (strategists including Francis Yared)
- Given improving data and relatively orderly markets, the ECB will find it increasingly difficult to maintain its easing bias, rotate short 10Y France into 5Y Germany
- Given ratings risks around BTPs, rotate short 10Y Spain into 10Y Italy
- Recent QE changes. potential for a reduction in the pace of QE later this year, measures announced by the ESM to reduce interest rate risk for Greece should add steepening pressure; enter EUR swap 10s30s steepeners
- Enter short 30Y gilts ahead of the upcoming long-end syndication; maintain receiving Gilts 5Y ASW vs USTs as swapped issuance should put continued pressure on GBP spreads
- Recent QE changes. potential for a reduction in the pace of QE later this year, measures announced by the ESM to reduce interest rate risk for Greece should add steepening pressure; enter EUR swap 10s30s steepeners
- JPMorgan (strategists including Fabio Bassi)
- ECB minutes show strong consensus for favoring a slowdown in pace of purchases from EU80b to EU60b per month, also endorse a steepening of the yield curve, by noting that it may “benefit maturity transformation and the profitability of the banking sector”
- Medium-term bearish duration outlook is intact: hold 10s30s steepeners, greens/15Y in EUR swaps; still expect the ECB to buy below the deposit rate, and keep longs in 2Y Schatz and Mar. 17 Schatz/OIS swap spread wideners
- In the U.K., May’s comments on single market access could strike a ‘hard’ Brexit tone, continue to think this will require additional risk premia in 5Y and 10Y gilts; stay short 10Y gilts, and continue to pay 15Y15Y GBP vs USD swaps
- See the ECB essentially on autopilot in terms of policy, likely making this week’s meeting a non-event
- NatWest Markets (strategists including Andrew Roberts)
- Week sees major focus on the U.K., expect weak employment data, which may shake up the front-end turning bear steepening to bull steepening, either way continue favor 5s30s steepening
- Any evidence of central bank buying below depo rate will steepen the curve; continue to like steepener theme via France 5s30s to capture an issuer who may move to issue more longs in 2017
- Hurdle to increase QE is high, underpinning trades where net supply is an important factor, continue to like steepeners and shorts in Italy in particular
- Jan. meeting is unlikely to give significant new clues to ECB’s reaction function; economic assessment may be slightly more optimistic, but the policy debate should be unchanged from December
- Morgan Stanley (strategists including Anton Heese)
- If the rate on the ECB’s collateral facility is going to become the main determinant on where German paper funds, then it is difficult to see upside from owning Schatz at yields below -70bps, unless one anticipates a renewed collateral squeeze
- 2y German paper remains remarkably rich on ASW, suggesting there is still a collateral premium for very short-dated German paper
- 7-10y sector remains cheap on the curve, with many of the bonds in this sector trading special on repo, which given it is the preferred sector for implementing Bund shorts, especially via futures
- Given the policy actions from the ECB in December, little is expected by the market from the week’s meeting, investors likely to focus on whether the stronger growth and inflation data are having an effect on ECB thinking
- Expect 5y sector to remain resilient in a rising rate environment due to the shift in ECB policy measures; continue to recommend 5s30s Bund steepener at 155bps
Source: BFW (Bloomberg First Word)
Tickers
2539Z GR (European Central Bank)
People
Cagdas Aksu (Barclays PLC)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
To de-activate this alert, click here
UUID: 7947283