EU RATES ROUNDUP: Don’t Fade the Sell-Off
(Bloomberg) -- Most analysts hold a bearish duration, steepener bias in EUR rates, given market implications from Trump presidency.
- JPMorgan (strategists including Fabio Bassi)
- Keep bearish duration bias at the long end as reflationist Trump is adding to existing bearish forces, but positions and valuations are less supportive than before
- In Germany, enter 2s3s flatteners and 10s30s weighted steepeners; short 10Y France vs. Belgium, hold short 10Y France vs Germany but add a stop
- In peripherals, Italy’s relative underperformance can continue: open short 10Y Italy vs weighted Portugal and Germany
- Front-end Eonias curve now prices ~10bps of hikes by Oct. 2018, another 20bps hike by Dec. 2019
- Front end of the curve is now cheap; receive greens Eonia and favor bullish structures via June Euribor 2Y midcurve call options
- In the U.K., close reds/greens weighted Sonia curve flatteners; shift to bearish bias in 10Y as expect correlation with U.S. rates to persist; holds 2s5s and 10s30s gilt curve steepeners
- Barclays (strategists including Cagdas Aksu)
- Following U.S. election, immediate focus for EGB markets turns to ECB’s reaction function and the political backdrop in the euro zone
- While relatively weaker EUR, rising inflation outlook and stronger U.S. economy is now expected, ECB is likely to take a cautious approach in December and extend QE by six months beyond March 2017 at the current pace
- Higher term premium now justified in bunds, don’t rush to fade the sell-off at current levels
- Futures-led sell off in BTPs and OATs has seen the 10y sector underperform, and think positioning is likely skewed toward short now
- These moves are overdone; recommend going long the belly of 5s10s15s on both Italy and France, using the futures contract CTD
- Also in futures, the availability of the 10y BTP as a macro hedge for risk assets has driven much worse performance of Italy vs Spain
- With supply outlook muted into year-end, likely short positioning in Italy, risk/reward favours going long 5y5y fwd Italy vs Spain
- Citi (strategists including Harvinder Sian)
- Republican clean sweep is outright bearish; short sighted to see trade wars as bond friendly; inflation metrics rise on autarky; fiscal stimulus is the upfront focus, lifting global nominal GDP and neutral rates
- ECB taper risk is enhanced by handover to fiscal, but also risk of stronger USD; in core EUR rates, bear steepening bias is enhanced on global nominal growth uplift, ECB taper risks not fully factored; raises 10y bund target to 0.50% from 0.30%
- Periphery remains a sell into ECB
- Strategically cautious on EGB spreads, with most widening amid a rising core yield environment; given upcoming political event risk, uncertainties going into Dec. ECB, don’t buy the dip
- BofAML (strategists including Ralf Preusser)
- Close German 10s30s flattener, see continued risks of long-end underperformance driven by a steeper U.S. curve, shortening in the maturity of Bundesbank purchases, as 5y reaches -40bps
- Recommend 3m30y ATM+25bps/ATM+50bps paying ~3.25bps; risk to the trade is a rally in long-dated EUR rates, i.e. if sell-off in U.S. rates fades, or ECB expectations increase
- Deutsche Bank (strategists including Francis Yared)
- Maintain bear steepening bias in EUR rates given market implications from Trump’s economic plan
- Make some adjustments to trades; rotate Germany 10s30s steepener into a long bund vs short 30Y France to capture an increased risk premium in France
- Move long breakeven from 10Y to 5Y, to reduce some of the EUR steepening bias
- To reflect the relative pressures on U.S., EUR rates and their relative breakeven performance, go long EUR 10Y real rates vs. USD
- Rotate the Italy 10s30s flattener into outright short 10Y BTP
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Fabio Bassi (JPMorgan Chase & Co)
Cagdas Aksu (Barclays PLC)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
Ralf Preusser (Merrill Lynch International)
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