EU RATES ROUNDUP: Steepener Bias Remains; JPMorgan Turns Bullish
(Bloomberg) -- Steepeners bias remains, as was the case heading into the ECB, though JPMorgan turns bullish European rates with a bias toward flatteners.
- Citi (strategists including Harvinder Sian)
- ECB QE extension is practically a given, but a slower pace of QE may be underestimated by the market given an evolving reaction function toward buying time
- Achieving 2% inflation on a sustainable basis still looks out of reach which makes it prudent to use QE tactically
- See bear-steepening risk into the December ECB meeting in anticipation of a slower QE pace and technical adjustments
- Prefer GBP 1y1y30y to establish long vega and positively rolling implied vol strategies: MORE
- Barclays (strategists including Cagdas Aksu)
- ECB kept options open, still likely to extend QE beyond March 2017 at Dec. meeting, though Draghi did not completely rule out the chance of a small reduction in the pace of QE
- Prefer to stay positioned for higher term, credit risk premium in long-end of EGB curve through the periphery, as credit risk premium remains low given upcoming political risks, macro backdrop
- Continue to hold Ireland 10s30s steepeners, short 30y BTP vs Germany and long 7y France ASW
- JPMorgan (strategists including Fabio Bassi)
- Draghi’s rhetoric was slightly more dovish than expected, opens small window for carry trades
- Bias turns to tactically bullish duration as the fear of tapering gets repriced though valuations remain expensive
- Recommend entering 2s5s flatteners to express a bullish view, exploit excessive steepening; hold bias toward 10s30s, 15s30s flattening
- Recommend scaling into overweight Italy, current valuations give adequate protection into the Dec. 4 vote
- Front end Eonia prices ~5bps of cumulative easing by late 2017/early 2018; expect policy rates to remain firmly on hold, stay neutral at the front end of the curve
- Deutsche Bank (strategists including Francis Yared)
- ECB bought more time, Draghi’s press conference has not altered expectation of no tapering, but a depo floor removal at Dec. meeting
- Maintain the same strategic bias toward higher term premium in core rates
- Recommend Italy 10s30s flattener given increasing concerns about referendum, political uncertainty in case of a ‘No’ vote
- Bearish case for U.K. fixed income remains valid as upcoming policy mix likely to see a shift toward additional fiscal support
- After recent richening of 30Y and vulnerability of 10Y point to retrace given the recent cheapening, exit short 30Y gilt vs. U.S., enter a UKT 10s30s steepener
- Morgan Stanley (strategists including Anton Heese)
- Bond market Indicators have grown more bearish over the last week, now recommend short positions in all four G-4 rates markets
- Highest conviction short is in Europe as growth data has been surprising to the upside, forcing a moderation of ECB easing expectations
- Continue to suggest investors short gilts outright and short bunds vs USTs
- Recent outperformance of France has been partly reflected by the cheapness of BTPs, also due to the favorable October seasonality; maintain 10s30s OAT flattener vs bund to express relative cheapness 30y OAT vs bund
- Commerzbank (strategists including Christoph Rieger)
- Take profit on 5s10s swap spread steepener given adjustments to the ECB QE framework largely discounted
- Hold on to breakeven wideners as the global reflation theme has further to run, positive carry over the coming months and mature issuance progress
- Nascent reflationary spirits are highly contingent on extended and comprehensive ECB support and will require QE reassurances in December
- Selling EUR rates vega optionality favorable for investors seeking to stabilize long-term portfolio returns and/or cash flows to better match minimum income requirements: MORE
- HSBC (strategists including Bert Lourenco)
- ECB ideally needs to construct higher yields for Germany to proceed with QE while keeping periphery, credit spread and the currency low; continue to advocate a steeper IRS curve and buying volatility
- Higher oil prices have helped push up inflation expectations which should pressure nominal rates; sell 30Y bunds and PGBs vs swaps due to PSPP uncertainty, program constraints
- Slowing year-end issuance volumes support lower EUR-USD Xccy basis, continue to favor front-end of the curve
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers JPM US (JPMorgan Chase & Co)
2539Z GR (European Central Bank)
People Harvinder Sian (Citigroup Inc)
Anton Heese (Morgan Stanley)
Bert Lourenco (HSBC Securities Inc)
Cagdas Aksu (Barclays PLC)
Christoph Rieger (Commerzbank AG)
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