EU RATES ROUNDUP: Bias Turns Neutral; Poor Liquidity Hits BOE QE
(Bloomberg) -- Analyst bias on core euro-area rates turns more neutral, with many still seeing additional easing priced into front-end of curve as overdone.
- Recent uncovered BOE QE operation attributed to illiquid markets by analysts; JPMorgan turns neutral on gilt duration
- Barclays (strategists including Cagdas Aksu)
- BOE QE buying, expected further QE easing in Sept. from ECB drive bond yields lower on supply/demand mismatch concerns, exacerbated by poor liquidity
- Outright duration, peripheral spread positions don’t offer good risk/reward; maintain portfolio of trades that have a relative short German duration, steeper curves, long ASW bias
- Short 10Y bunds vs Treasuries, receive 15Y fwd point on the EUR swap curve vs wings, long PGB 4s30s steepener, long 7Y French ASW
- BNP (strategists including Eric Oynoyan)
- Latest Japan finance ministry data show first net Japanese investor outflows from euro-zone long-term securities since Aug. 2015; supports view that 10Y core yields have found a floor
- Expect recent trading range in 10Y bund yield to continue to hold in near term with strong resistance below -20bps level
- Maintain long 3-mo. -0.10/+0.10 put spread on bunds recommended a month ago when 10Y bund yields were close to -20bps
- Morgan Stanley (strategists including Anton Heese)
- While five of seven bond-market indicators have turned more bearish, avoid following their advice; suggest investors remain neutral on duration in the U.S., Germany, and lean long in U.K., Japan
- Recommend investors remain long gilts vs short bunds cross-market in 2Y and 30Y sectors
- For investors looking to position for fiscal expansion as a theme, recommend buying 1y20y JPY payers vs EUR
- JPMorgan (strategists including Fabio Bassi)
- Turn neutral on gilt duration for coming week following recent extreme moves and ahead of upcoming supply; maintain 2s10s flatteners as medium-term trade
- Recommend selling belly of 10s30s50s fly as short- term tactical trade, currently sits ~10bps too rich
- Recent uncovered BOE buyback in long-end reflects illiquid summer trading, lack of DMO supply, unlikely to be repeated; see scope for a mini-tender in 30Y gilts next week
- Maintain 10s30s flatteners in core EGBs, hedged with 3s5s and 6s12s steepeners; hold long 3Y Spain, Austria vs Germany, 8Y Italy, Ireland vs France
- Hold bearish bias on green Eonia via reds/greens steepeners; recommend adding conditional bear steepeners in Euribor, buy 2Y Dec. 16 midcurves 100.375/100.25 put spread vs sell 1Y Dec. 16 100.375/100.25 put spread for 1 cent
- Deutsche Bank (strategists including Francis Yared)
- BOE QE, benign risk environment result in continuation of hunt for yield; inability of 10s30s bund curve to flatten, while spreads tighten, suggests investors move along credit spectrum rather than extending duration
- Despite reduced likelihood of ECB announcing any significant change to QE technical parameters, bobl spreads have outperformed; recommend entering bobl spread tightener vs buxl
- Italy 10s30s curve remains flat; recommend entering steepeners given potential long-dated issuance after summer break, reduced volatility in 10Y sector vs 30Y
- Recommend altering long Portugal 5Y vs Italy 10Y, moving into simple 5Y spread position rather, instead of cross- market steepener
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Cagdas Aksu (Barclays PLC)
Anton Heese (Morgan Stanley)
Eric Oynoyan (BNP Paribas SA)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
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