EU RATES ROUNDUP: Steepeners in Vogue; Low Conviction on Bunds
(Bloomberg) -- Analysts focus on EGB supply and recent improvements in inflation data, while most are low conviction on outright duration, there is a consensus steepener view on the curve.
- Barclays (strategists including Cagdas Aksu)
- As heavy supply returned to the market this week, EGB spreads have selectively widened; turn bearish on EGB spreads which have less downside in tightening episodes
- Usual candidates for shorts in EGBs would be France and Italy, given the political backdrop, benefits of liquid futures contracts. However, in an optimistic scenario these spreads have more upside for tightening, given the wider levels
- Therefore, focus shorts in 10y Spain and Austria vs Germany as see these spread levels likely have less tightening upside in a steady state scenario
- Bearish view on spreads underpinned by ongoing political risk, high yield level which may lead to some questioning of debt sustainability for the highly indebted nations, while the EGB issuance pipeline is typically very front-loaded in Q1
- NatWest Markets (strategists including Andrew Roberts)
- Low conviction on duration as Bunds continue to tread water, impressed at their resilience given the stronger data and inflation; political risks swirling in H1 2017 (Netherlands, France), ongoing QE offers support
- Recommend 5s30s steepeners in Europe, given the global bounce in PMIs, increased risk issuance, ECB shift to shorter maturities and mimicking BOJ; this trade is best expressed in France
- Big risk is that issuers may think that QE has held yields down, and that they now have one year to get all their risk issuance completed before curves bear steepen back when QE abates down to zero (though this is not NatWest’s base case)
- Recommend short 10y Belgium long vs Netherlands; Belgium normally launches a new 10y in January, PSPP flows are a smaller fraction of Belgian supply, OLOs are more likely to be pulled wider on French electoral risks
- Recommend long 10y Ireland vs France; concession ahead of recent syndication and implied de-emphasis of 10y as a funding point for 2017 is supportive for the sector; 2025s are also cheap on relative value metrics
- Deutsche Bank (strategists including Francis Yared)
- Strategic case for higher rates remains valid: growth is improving, pipeline inflation is rising, immediate banking system concerns have receded; market is underpricing the odds of a further reduction in the pace of QE
- PMI price pressure index is now in positive territory, at levels which historically would have been consistent with the ECB considering tightening policy
- Remain long EUR 10Y Breakevens given rising pipeline inflation
- Hold short 50% France/50% Spain (weightings reduce the beta, reflect the pricing of political risk, further reduction in the pace of QE and mitigate potential positioning risk in BTPs)
- Maintain short Buxl ASW, pricing of further reduction in the pace of QE
- In the UK, maintain Gilt 10s30s steepener as curve remains very flat ahead of a pick-up in supply, short 10y real rate as Gilt remains the most expensive on a cross market basis, short Gilts 5Y ASW vs UST on increased issuance, no extension of QE and unwind of year-end liquidity pressures
- Morgan Stanley (strategists including Anton Heese)
- Not a great time to take directional risk in euro rates, given the still-supportive longer-term supply outlook but offset by the bearish recent growth and inflation data
- The stronger inflation numbers, if sustained, will be an important development, but may not be enough to shift market expectations for the ECB in the short term
- Similarly, heavy issuance should command a concession and may cause the market to trade heavy, but with the ECB committed to continuing to buy for the rest of the year, the net supply picture remains very supportive for euro sovereigns
- First week of the year has been a busy start for sovereign supply, estimate Q1 supply in duration terms to be particularly heavy from semi-core issuers; supply outlook in the near term and the changes on the PSPP program will put steepening pressure on the core and semi-core curve
- Suggest holding on to the German 5s30s steepener, France-Spain 10s30s steepener, and 10y20y OAT-Bund forward spread widener
- Attractive opportunity to own U.K. front end as markets don’t price in any probability of the rate cut Morgan Stanley economists expect
- Recommend long L Z7 (Dec. ’17) short sterling at 99.50
- BofAML (strategists including Ralf Preusser)
- Repo and cross-currency bases behavior over year-end turn suggests that short positions in European fixed income remain very significant, shorts seem to have been reset with cross-market spreads materially off their highs
- Remain comfortable with bearish long-end view, relative to forwards; rates have corrected higher over the first few days of January, as the upside risks have grown in importance
- Euro area inflation base effects present upside pressures on headline inflation through energy prices which risks emboldening ECB hawks and recent technical changes to ECB QE parameters
- As the timing of further significant selloff is uncertain, we re-iterate the attractiveness of long- dated payers on long tails, as a positive carry protection against higher rates
Alert:
HALISTER1Source: 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)
Francis Yared (Deutsche Bank AG)
Ralf Preusser (Merrill Lynch International)
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