EU RATES ROUNDUP: Steepeners Into ECB, say Citi, Deutsche Bank
(Bloomberg) -- Steepeners in vogue ahead of this week’s ECB meeting.
- Deutsche Bank, Citi maintain bearish steepening bias, while JPMorgan looks to pare down risk ahead of the ECB meeting; RBS sees return of scarcity concerns putting an end to recent steepening
- Citi (strategists including Harvinder Sian)
- Remain bearish EUR rates into ECB decisions on PSPP technicals, taper; upcoming ECB meeting has asymmetric bear steepening risks; view remains that PSPP technical shifts should result in a steeper curve
- Look for ECB tapering via a step change to lower volumes (EU80b to EU60b) alongside an extension of the timetable from Mar. 17 to Sep. 17; outright bearish for rates, target +0.30% in 10y bund
- Fade the front end rate cut pricing, own steepeners, short buxl vs eonia, short 30y bunds cross market (vs UST/JGB), looking for higher periphery forward rates; also recommend EUR 3m30y 1x2 payers at zero-cost: MORE
- U.K. long-term inflation risks may be overblown, 5y5y RPI “looks like a sell” and has risen beyond just currency effects and higher oil prices; this helps inform a bullish lean, but the risk-reward is better in cross-market via owning 30y gilts vs bunds, and on the curve through 10s30s gilt flatteners
- JPMorgan (strategists including Fabio Bassi)
- Tone down bearish duration bias ahead of ECB, close short 15y Germany, 2s4s steepener, maintain a cautious and selective periphery overweight and non-Germany core underweight
- Enter 2s10s Portugal flattener vs Germany ahead of DBRS review, expect the PGB curve to flatten relative to Germany in both narrowing and widening scenarios
- Base case scenario of no DBRS action would see PGB curve to bull flatten relative to Germany, while a downgrade would see the curve invert in order to price higher level of uncertainty in the near term
- It is almost certain that the ECB will extend QE beyond March, see only a 20% chance of a reduction in the pace of purchases to EU60b per month
- In the U.K., retain a bearish bias on yields as expect markets to price higher risk premia due to increased inflation expectations, concerns over potential currency-related outflows
- Stay short 30y gilts but close 10s30s gilt curve steepeners, take profit on 30s50s gilt curve flatteners
- RBS (strategists including Andrew Roberts)
- Getting toward year-end, QE’s relentless demand will increasingly be met by scarcer supply, there will not be enough long-end supply to satisfy PSPP requirements in Q4; steepening of the EUR core curves has now run its course
- Recommend buying 30y Germany at auction, 10s30s flatteners in Germany, long 20y Netherlands vs RAGB, long 8y Ireland
- Moderately bearish on U.K. breakevens as move has overshot what is justified by GBP weakness as underlying inflation pressure still “weak”
- Supply is supportive for now, but after the conventional 2065 sale it will turn negative for linkers
- Recommend paying 10y inflation swaps at 3.41%, target 3.2%, stop at 3.55%
- Risk events in near term should justify higher implied volatility for shorter dated expiries, favored expression is to go long 2y10y vs short 7y10y in EUR swaption straddles
- Deutsche Bank (strategists including Francis Yared)
- ECB is likely to wait until Dec. before announcing the technical changes to QE; capital key change unlikely, though to show QE works under all market conditions, will need to relax depo rate floor
- Maintain the same strategic bias toward a bear steepening of the curve; hold 10s30s steepeners
- Exit bobl-buxl ASW spread as now prices ~75% probability of a full depo floor removal, see risk that the ECB only partially eases the depo floor restriction; hold long EUR 5Y breakeven as it “remains cheap” relative to other markets
- Given the steepening of the money market curve, rotate short EUR 5y into a lower beta short EUR 1y1y to focus on the area that prices the cuts; hurdle for further cuts remains high
- In the U.K., rates weakness driven largely by FX, as weaker sterling supports breakevens; issuance is rising, while low real rates may lead the BOE to re-assess gilt QE, likely to drive a continued underperformance of U.K. fixed income
- Barclays (strategists including Cagdas Aksu)
- DBRS decision on Portugal may be key; while a downgrade to sub-IG is unlikely this week, the outlook is important
- A move to negative watch would imply a possible move to a sub-IG rating in months, would mean a loss of PSPP eligibility, has the potential to be negative for other peripheral spreads
- Continue to like being long belly ASWs in core outright, as well as vs longer-end ASWs, well suited for the upcoming likely QE parameter changes and potential ECB communications
- Stick with 10s30s Ireland steepener, short 30y BTPs vs Germany, long 7y France ASW and short 5s15s Finnish ASW box
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Harvinder Sian (Citigroup Inc)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
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