EU RATES ROUNDUP: Bearish Views on EUR Rates, Gilts; BTP Risks
(Bloomberg) -- Analysts hold bearish views on EUR rates as improving data, central-banker comments have gradually reduced expectations for further ECB policy easing.
- Focus turns to rising BTP risks ahead of Italy’s referendum, while bearish gilt bias persists given U.K. data improvements, falling BOE expectations and supply outlook
- Citi (strategists including Harvinder Sian)
- Risk is rising that ECB hawks, centrists will prevent a vanilla extension to ECB QE from March 17, under the mistaken view of treating QE as more of stock effect than flow effect
- Timing is the issue in trading EUR rates, with bullish event risks from U.S., Japan; continue to favor conditional steepeners (EUR 5s30s curve caps) and 10s30s 5y fwd steepener, which is less susceptible to global rate moves
- Position in steepeners ahead of Oct. 20 ECB; like being short 30y bund vs 30y USTs and JGBs, also like short buxl ASW (vs Eonia) boxed against schatz ASW
- See idea of depo-floor removal as more likely than “fudge” of capital key, though legal implications unclear in any case; Wiedmann’s recent defense of sanctity of the key is important
- Morgan Stanley (strategists including Anton Heese)
- Have been holding neutral-duration biases for some time; now turn bearish on bunds relative to USTs due to growth and inflation data surprising to the upside
- Data may influence ECB policy, could make QE tapering a reasonable probability in 2017; suggest investors sell 10y bunds vs USTs
- In the U.K., remain bearish on 10-year gilts after string of better-than-expected data releases, resilient risk-asset performance; flatter yield curve also means attraction of owning gilts for carry and roll has deteriorated
- No longer suggest selling 10y gilts vs JGBs; instead suggest selling long gilt futures outright
- In peripherals, recommend initiating short 10y BTP/bund positions to capture any continuation of risk aversion, deteriorating Italian political outlook
- Maintain short BTP vs Bonos recommendation; still hold the view that rising political risks in Italy, risk- aversion hedging demand on BTP futures should cause Bonos to outperform
- Barclays (strategists including Cagdas Aksu)
- Were previously short 30y BTPs outright, though recently converted this into a spread trade vs Germany; see room for BTP risk premium over Germany to increase in long end ahead of Italian referendum, political/fiscal uncertainty in Portugal
- ECB backstop via QE purchases is an important market support but unlikely to be enough to prevent 20bps-40bps widening episodes
- Turn neutral on 10y UST/bunds convergence trade, given the potential for an increase in term premia in the U.S. in 4Q given election risks, coupled with the possibility of a risk-off event in Europe
- In the U.K., recommend being short 5y gilts vs USTs given the BOE’s aversion to negative interest rates and the potential for a positive economic narrative to restore some risk premium to the curve
- Deutsche Bank (strategists including Francis Yared)
- Increased risk aversion is counteracting the impact of the “reverse twist” engineered by the BOJ, and impact of potential removal of the depo floor by the ECB
- Maintain a reduced steepening risk, though further hedge this with a Bobl/Buxl spread flattener
- Increased focus on potential “hard” Brexit outcome together with more dovish MPC speak, which has led to additional pricing of cuts; Nov. 17 meeting now pricing 13bps of cuts
- Continued positive U.K. data is more likely to reprice the late 2017 meetings given this is where the recent rally has been sharpest; recommend going long Feb. 17 MPC Sonia vs Nov. 17
- Headwinds from October gilt issuance begin to hit this week, with the heavy supply at the long end generating a significant duration impact for the market to absorb; further, Autumn statement may show additional GBP8b-10b in financing needs
- Maintain short 10Y real rate; maintain long 15Y swap spread vs 30Y into the upcoming long end supply
- JPMorgan (strategists including Fabio Bassi)
- Despite recent rally amid European banking concerns, backdrop for bonds has become incrementally less supportive, as ECB commentary doesn’t suggest aggressive easing is forthcoming
- Stay short duration on improving growth, inflation outlooks plus ECB rhetoric
- Improvement in U.K. economic data suggests no further BOE rate cuts this year, while BOJ’s outline of Oct. purchases suggests a shortening of average maturities
- Pressure for higher yields remains intact, hold shorts in 15Y Germany; in the front-end, further ECB easing priced in by markets looks excessive, recommend paying Sep. 17 ECB OIS, and keeping reds/greens EONIA steepener
- In EGB spreads, keep modest exposure to periphery spread tighteners in Spain and Ireland; In core, favor spread wideners vs Germany
- Stronger than expected activity data makes a BOE rate cut unlikely, close long Nov. 16 MPC OIS; enter shorts in 30Y gilts on stretched valuations and upcoming supply, enter 10s30s steepeners
- RBS (strategists including Oriane Parmentier)
- Expect recent rally in EUR rates to continue; latest BOJ QE announcement “holds a few demons” but should not impede global bond rally
- Higher oil is leading to higher CPI forecasts, and as a result, bearish views on European rates coming from the street
- Oil move worth ~0.2% on 2017 CPI, not enough to move ECB course given core CPI is the problem
- Italy referendum confirmed for Dec. 4, market focus may turn to this, still like BTPs but look to cut risk, preferring SPGBs
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
Topics Italian Electoral Law of 2015
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