EU RATES ROUNDUP: Steepeners Still in Vogue; RBS Says Buy Bunds
(Bloomberg) -- Analyst focus switches to BOJ meeting this week, given possible implications in EGBs if BOJ policy shift to steepen JGB curve.
- Steepeners remain in vogue, though analysts highlight risks around BOJ meeting, JPMorgan stays short duration, RBS says now time to buy bunds as “no evidence of price pressures”
- Citi (strategists including Harvinder Sian)
- Global long-end yields should move on FOMC, BOJ outcome on Sept. 21; Fed unlikely to break new ground, while BOJ outcome has little consensus
- Expect BOJ to confirm lower maturity target for QQE, “reverse operation twist”, which is largely factored in; rates cuts would trigger another global yield collapse; more flexible JPY80t target for QQE would be a tapering signal and would be bearish
- Continue to hold EUR steepeners, buy Bund weakness near 0.15%-0.20%, which is cheap to 10y Bund fair-value calculation at 0%, even without ECB QE
- Expect no shift out of the global low-rate regime and would be buying rates once steepening targets are met
- Recent sell-off has been led by long end of gilt curve; believes catalyst comes from market doubts about longevity of QE, after ECB inaction, thoughts of MPC overreaction
- MPC has kept alive prospects of another rate cut this year, gilts may have overshot, the correction may have further to run, see move as premature; look to get long 10y gilts ~1%
- JPY rates volatility to continue to outperform EUR vol in the short term: MORE
- RBS (strategists including Giles Gale)
- Recommend getting long 10y bunds now, as sell-off not being driven by fundamentals with “no evidence of any price pressures whatsoever”
- Positioning doesn’t argue for a bear steepening sell-off as seen in Q2 2015
- EMU supply is lengthening but this is overridden by QE; monetary tightening isn’t on the agenda for either the ECB or the BOJ
- Unclear if BOJ result is major enough to drive yields higher than they have already risen to during this mini sell-off; any bull steepening JGB curve would lead to short covering in Europe
- JPMorgan (strategists including Fabio Bassi)
- Retain short duration exposure in bunds, but shift from 10Y to 15Y maturities as long end should be more exposed to a steepening from Japan
- Ahead of BOJ, enter 3s20s weighted bear steepener and bull flattener, take profit on 2s10s and reds/5Y5Y weighted bear steepeners
- In vol, stay short Dec. 16 Schatz gamma, take profit on short Oct. 16 Bobl unhedged strangle
- In EGB spreads, retain modest exposure to periphery spread narrowers with longs only at front end of the curve in Ireland, Spain
- MPC maintained a data dependent easing bias, stay long Nov. 16 MPC OIS; retain a modest bearish bias on risks from the BOJ, rich 30Y valuations; maintain 10s30s gilt curve steepeners
- Morgan Stanley (strategists including Anton Heese)
- Bond market indicators remain neutral for 10y UST, Bunds, remain short for gilts, JGBs
- In U.K., 10y likely to lead in a sell-off because of liquidity being concentrated in futures contract, no longer believe being short the belly is an effective way to express short duration bias
- Instead prefer to recommend being short 10y gilts vs JGBs; key risk is a more dovish message from Fed or BOJ this week
- See risks to expectations that BOJ either acts on Sept. 21 or encourages the view that any future action will steepen the yield curve primarily, as opposed to lower real rates
- Disappointments on these fronts would put global yield curve steepener at risk
- Expect BOJ to cut rates to -0.20%, simultaneously reduce its purchases of long-dated JGBs; see this as consensus view amongst investors outside Japan
- Barclays (strategists including Cagdas Aksu)
- Expect volatility to remain high in EGBs over Q4 with upcoming ECB actions and political events; still see short outright 30y BTP offering good risk-reward
- Unwind Portugal 4s/30s steepener after recent performance
- Don’t see any value in long-end German ASWs, though see long 7y French ASW as a very low risk trade that offers notable upside in ECB various scenarios
- Portugal’s fundamentals are weak, though eligibility threatening DBRS downgrade seems unlikely; difficult weeks ahead for PGBs, though potential increased PSPP support suggests some light at the end of tunnel
- In U.K., as long as MPC remains committed to further easing, albeit with timing unspecified, subdued expectations can leave GBP2s5s flat, even as the curve resteepens
- Deutsche Bank (strategists including Abhishek Singhania)
- Sell-off in EUR rates has inarguably been driven by a number of factors, many of which are global rather than specific to the euro zone
- EUR front end is now pricing only 10bps of further cuts over next year which isn’t as extreme as previously
- BTP/Bund spreads have widened disproportionately given sell-off in Bunds; recommends long position in 5Y BTPs
- Maintains Germany 10s30s steepeners but sees risks from BOJ
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Abhishek Singhania (Deutsche Bank AG)
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Giles Gale (Royal Bank of Scotland Group PLC)
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