EU RATES ROUNDUP: Reduce, Reassess Risk After Recent Selloff
(Bloomberg) -- After being bearish EUR rates in recent weeks, analysts turn neutral to reassess or reduce risk following the speed of the recent rate repricing; ECB meeting, Trump policy expectations are in focus.
- Deutsche Bank (strategists including Francis Yared)
- Scale, speed of rate repricing since U.S. election prompts reassessment of the outlook relative to current market levels
- Maintain bearish bias, but reduce the beta to reflect a less favorable risk/reward following the recent repricing
- Still see scope for further repricing of core rates; U.S. terminal rate remains benign, risk premium below last year’s average, financial conditions resilient so far
- Maintain existing trades: short 10Y BTP; long 10Y bund vs 30Y OAT given political risk in France, long-end steepening view; long bund ASW as a hedge against a more generalized risk-off
- In the U.K., front end is now at the highest levels since the referendum, despite continuing uncertainty over U.K., BOE outlook; add Dec. 16/Dec. 17 flattener as the market is now pricing 9bps of hikes by the end of 2017
- Morgan Stanley (strategists including Anton Heese)
- Following large bond-market selloff, turn neutral on duration; difficult to call political outcomes, decide when markets have priced in enough stimulus, which itself is of uncertain size and timing
- Wait for evidence that reflationary rhetoric of Trump and the tax reform plan put forth by the U.S. Speaker are coming together
- Taper expectations in Europe are inconsistent with inflation measures; breakevens still price inflation well below 1% y/y in Dec. 2017, which would prevent ECB ending QE, unless it was replacing it with some other accommodative measures
- Risks around the market’s short-term inflation expectations are to the upside, as inflation is priced to stay below 1% y/y for the next four years
- Recommend being long both front-end euro breakevens, 11/2019 SPGBeis, and front-end euro real yield, 05/2022 BTPeis
- Citi (strategists including Harvinder Sian)
- Don’t buy the dip in EGB spreads given both macro factors and various idiosyncratic drivers; BTP/bund spreads can approach 200bp in near term given referendum, Dec. ECB meeting
- Despite higher peripheral yields, problematic to see ECB hawks leave empty handed at the Dec. meeting, so still expect a taper
- Confluence of factors aids widening in BTP spreads including technical (high DV01 of supply, bank selling), fundamental (banking-sector concerns), political event risk
- Bearish 10yr bunds, target 0.50%, based on technical ECB PSPP parameter shift, taper to EU60b from EU80b; an extension by 6 months at EU80b is not consistent with higher yields
- Odds of something rather more left-field from the ECB has risen, something like proxy yield targeting on bunds
- Recommend bobl invoice spread wideners vs eonia on the back of scarcity issues that will not be resolved even with our forecast of a taper; project ECB will own near 35% of the German market by end-2017, which correlates to a further 10-15bp richening of German general collateral vs Eonia
- BNP (strategist including Patrick Jacq)
- Bearish trend developing due to a reassessment of the outlook for U.S. growth, inflation and monetary policy; still see risk of a rise in yields in coming weeks, accompanied by further steepening as the short end is well protected
- Close tactical long 5y Obl position (for a 5.5bp loss); keep short 10y swap with a target at 1%, hold steepeners (bund 10s30s and 5y5y/10y10y), continue to receive 2y/5y/10y swap fly 3y fwd
- Think semi-core spreads are now capped: they are back to the upper side of their PSPP range and fast money is very short
- HSBC (strategists including Bert Lourenco)
- Italy’s constitutional referendum is coming into focus given the momentum that populism is enjoying; French presidential elections next year will also be crucial
- Inflation expectations are rising but not sufficiently for the ECB to turn hawkish.
- The longevity and mix of easing measures remain highly uncertain, in the face of program constraints and costs to a banking system awash in liquidity
- Recommend long 7Y OATs, 10Y SPGBs on ASW and position for the back-end of the EUR curve to flatten
- In the U.K., think the selloff should slow down but continue to prefer paying rates across the curve, positioning for a steeper real rates curve
- Month-end index extensions are negligible for gilts and EGBs, but large for index-linked gilts
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Francis Yared (Deutsche Bank AG)
Anton Heese (Morgan Stanley)
Bert Lourenco (HSBC Securities Inc)
Harvinder Sian (Citigroup Inc)
Patrick Jacq (BNP Paribas SA)
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