EU RATES ROUNDUP: Stay Bearish Bunds, Gilts; Taper Concerns Rise
(Bloomberg) -- Analysts continue to hold bearish views on EUR rates, gilts; recent ECB taper story has gained focus, while risks of hard Brexit, shift in U.K. policy have increased.
- Citi, Deutsche Bank maintain short bias in EUR rates front- end as further cuts to ECB depo rate look increasingly unlikely
- BNP (strategists including Eric Oynoyan)
- Bears driving recent selloff are misguided, with markets placing too much weight on the possibility of ECB QE tapering
- Expect bullish tone to resume, along with flattening pressure on curves; maintain an outright long 10y bund position, receive 2s10s swap (raise stop to 61bps)
- Use Oct. seasonal tightening in EUR-USD xccy basis to enter receivers ahead of seasonal widening in Nov. driven by pickup in EUR issuance vs decline in yankee issuance
- Morgan Stanley (strategists including Anton Heese)
- Direction of monetary policy in Europe, U.K. came into focus this week, with markets doubting the ability of BOE, ECB to ease further; remain bearish on gilts and bunds vs UST
- Price action following the denial of the taper story showed rates markets finding it difficult to rally; that shows the position of the market is likely still skewed toward long
- While difficult to estimate, first full 25bp rate hike pushed to late 2021 and inflation market pricing showing a collapse back below 1% y/y after energy base effects roll out imply ECB to retain existing measures for years to come
- Deutsche Bank (Francis Yared)
- U.K. government stance has increased risk of a hard Brexit, rebalancing of policy mix toward more fiscal easing; both developments are bearish U.K. fixed income
- Recent selloff could be more sustainable given better U.S. data, less dovish central banks, higher oil prices and the repricing being driven by breakevens rather than real rates
- Increase bearish risk, adding a short 30Y gilts vs UST position
- More acknowledgement of the costs of negative, low interest rates on the banking sector suggests that ECB unlikely to cut deposit facility rates further; maintain paid position in Eonia 1Y fwd 1Y
- Citi (strategists including Harvinder Sian)
- ECB tapering is “feasible” alongside a 6-month timetable extension; could be a pace reduction from EU80b to EU60b or lower; market would view change in QE as tapering
- Could push 10y bund yield to ~30bps; timing of first hike is brought forward as real rates move higher, this would therefore be a “policy error”: MORE
- Paying forward EONIA swaps in short tenors is an attractive proposition assuming that conventional monetary policy (i.e. nominal rate cuts) has broadly run its course, regardless of potential tweaks to QE: MORE
- Beyond ECB policy debate, politics likely to be key factor in governing tone for EGB spreads; remain selectively cautious in weeks ahead for BTP, PGB spreads
- Bono spreads likely to see ongoing resilience on a relative basis, as base case is for PP-led government materializing
- TD Securities (strategists including Renuka Fernandez)
- Continue to hold EUR 5s30s steepeners, 10y UST/bund tighteners, paid positions on 3m EUR-USD cross-currency basis spreads, all of which have benefited from recent ECB reports of on tapering of QE purchases
- Timing of ECB “taper rumors” have fueled a sharp re- pricing as they were very soon after the BOJ decision to add yield curve control, remove some focus on buying in the ultra-long end
- View remains that ECB will look to announce a 6-9 month extension of QE in Dec., likely to be at a tapered amount relative to the current pace
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anton Heese (Morgan Stanley)
Eric Oynoyan (BNP Paribas SA)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
Renuka Fernandez (Toronto-Dominion Bank/The)
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