EU RATES ROUNDUP: Steepeners in Vogue as QE Changes Still Afoot
(Bloomberg) -- Analysts still see ECB QE expansion, changes to parameters, later this year; bias remains bearish on EGBs after ECB disappointment, with steepeners now in vogue as analysts look at impact of potential changes of PSPP and BOJ’S efforts to steepen yield curve.
- Barclays maintain trades to benefit from changes in PSPP parameters, adds bear flatteners in front-end on reduced rate cut expectations
- Deutshe bank, Morgan Stanley, TD Securities look for steeper German curve, as market prices in QE changes
- In U.K., RBS recommends cross-market steepeners as issuance set to rise; Morgan Stanley recommend short 5Y vs USTs as data improves, easing expectations fall; Deutsche Bank note scarcity in “medium-term” QE bucket, suggests sector set to outperform
- RBS (strategists including Imogen Bachra)
- Still expect ECB to move in Dec., with QE extension, depo cut and increase in QE to be announced: MORE
- In U.K., upward revisions to DMO medium-term issuance projections are typically accompanied by long-end cross- market underperformance; recommend paying GBP 15y fwd 15y, vs EUR 7y fwd 5y
- Bonds don’t look rich despite yield levels because growth is falling, as shown in long-term nominal GDP forecasts vs 5y5y
- Barclays (strategists including Cagdas Aksu)
- Despite ECB emphasizing substantial amount of monetary support, committee shied away from reinforcing QE extension expectations beyond March 2017; perceived as bearish for EUR rates
- Still see ECB announcing time extension of QE in Dec.; expect relaxation of QE parameters in Oct.
- Options such as extending maturities past 30y or removing issuer/non-CAC limits could be positive for long end duration, while dropping the depo floor can be positive for short-end bonds, and shouldn’t be bullish for the longer ends of curves
- Maintain portfolio of trades that benefit from various EGB QE parameter changes: short 30y BTPs outright; short 10y Bunds vs USTs; long 7y French ASW, Portugal 4s30s steepeners
- In EUR front-end, bear flatteners look attractive; recommend buying EUR 6m 1y1y ATM payers funded by selling EUR 6m 3y1y ATM+15bp payers at costless, to gain from a scenario where further rate cuts by ECB are priced out
- Morgan Stanley (strategists including Anton Heese)
- Less dovish ECB meeting, expectations for a similar outcome from upcoming BOE meeting; belief that BOJ wants a steeper yield curve have put global duration on the back foot with global yield curve steepeners becoming consensus view
- ECB statements suggest an extension of easing measures, changes to parameters of PSPP both still highly likely; continue to position for a decline in the bund scarcity premium through bund 10s30s steepeners vs OAT flatteners
- In U.K., turn more bearish on duration, look for belly of the curve to underperform and recommend going long 5y USTs vs 5y gilts, following recent upward revisions to 2016 growth forecast and expectations of less easing from MPC
- Still expect the MPC to cut by a further 10bps in November, but this now looks like a close call; also think the MPC will wait until next year before extending QE further
- Belly of U.K. curve looks vulnerable as it is more responsive to economic data, doesn’t benefit from pension hedging demand; recommend paying 10y on GBP 5s10s30s fly
- Deutsche Bank (strategists including Francis Yared)
- ECB still likely to extend its asset purchases, though undertone of last week’s meeting more hawkish than priced
- BOJ’s recent efforts to steepen the curve fits with more patient approach from ECB
- Maintain a bearish, higher term premium, wider breakevens bias in portfolio; hold short Gilts 5Y5Y, short EUR swap 5Y, long EUR 5Y breakevens
- Odds of ECB increasing issue limit have dropped, may increase scarcity issue; add German 10s30s steepeners to reflect the re-balancing of odds between technical changes
- Draghi’s comments about rate cuts should not encourage market to price further cuts; recommend paid position in Eonia 1Y fwd 1Y outright (rather than vs JPY)
- In U.K., next week’s medium basket APF operation will see a limited free float of bonds availability to purchase, scope for outperformance of this bucket as a result; recommend being long 15Y spreads vs 30Y
- Citi (strategists including Harvinder Sian)
- ECB introduced volatility by failing to even discuss QE extension, bearish for rates
- QE extension still heavily favored; committees will now evaluate changes to PSPP parameters, issue limit changes must be close
- Issue limits, depo floor, capital key are all on the table, though only latter two buy enough time for an extended purchase program
- Raise probabilities on depo floor, capital key shifts at the expense of issue limits; see plenty of juice in steepeners, Buxl ASW cheapening as a result
- TD Securities (strategists including Renuka Fernandez)
- Move away from capital keys allows ECB to buy more semi- core, periphery bonds at the expense of Bunds; would steepen Bund curve
- Dropping depo rate threshold would lead to a more significant steepening, as ECB can buy in 2-7Y sector of German curve, relieve flattening pressure
- Look for any pullback in rates to initiate a 5s30s Bunds steepener, target 100-105bps entry range from 110bps currently
- BNP (strategists including Patrick Jacq)
- EGBs yields rose after ECB disappointed markets by not announcing any QE extension; see medium-term opportunity to re-enter long positions after the correction: MORE
- In ASW curve, Schatz ASW mispricing vs 5y is above previous May 2015 extremes, with the ECB now on hold until December; there is little room for a further richening of the Schatz vs the Bobl ASW
- Recommend selling Schatz vs eonia vs going long Bobl vs eonia at -5bp, add on any move to - 7bps targeting 0/+2bps, stop loss at -9bps
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
Imogen Bachra (Royal Bank of Scotland Group PLC)
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