EU RATES ROUNDUP: ECB Autopsy; Front-End Too Aggressively Priced
(Bloomberg) -- While ECB largely dismisses scarcity issues, analysts suggest trades in anticipation of future moves; most see increasing limit on non-CAC as most likely first step.
- Analysts at Deutsche Bank, JPMorgan, Citi see front-end of Eonia curve too aggressively priced for future rate cuts
- Barclays (strategists including Cagdas Aksu)
- No surprises from ECB; Draghi shied away from providing any new policy easing, technicality changes while giving strong indications that both are likely due in September
- Recommends trades to take advantage of upcoming ECB policy easing/changes; long 7y French ASWs, would perform strongly if ECB increases limit non-CAC bonds given large free- float; the issue has never traded below depo rate, large cash-flow from France due this week
- Recommends Portugal long 4y (non-CAC) vs short 30y (CAC); if ECB were to announce longer QE in Sept., and increase the limit on non-CAC bonds; large short-end non-CAC bonds on the Portuguese curve should benefit notably
- Morgan Stanley (strategists including Anton Heese)
- Remain neutral on G4 duration and curves into Fed, BOJ, bank stress tests; suggest investors go long duration across G4 bond markets over next several months
- Concentrate duration longs in the regions where central banks have room to ease quantitatively, the U.S. and U.K.
- Expect yield curves to end steeper than implied forwards over next 12-months; some risk of QE-inspired curve flattening means prefer duration longs in the belly of yield curves
- Further easing by ECB in Sept. along with rally in USTs to keep bund yields close to all-time lows into year-end
- Potential changes to PSPP parameters, should reduce scarcity premium in long-end, also support sovereign spreads
- JPMorgan (strategists including Fabio Bassi)
- Unbothered ECB means scarcity remains important driver; hold longs in 3Y Germany but with reduced conviction; maintain 10s30s flatteners, add Sep16 Buxl outright swap spread widener
- Hold modest intra-EMU tightening exposure on expectation of continued search for yield flows, limited headline risk and supply pressures; long 3Y Spain vs bunds, 8Y Ireland vs OATs
- Sharp drop in U.K. flash PMI gives green light for MPC to launch substantial package of measures at Aug. meeting; stay long Nov. 16 MPC OIS, keep receiving the belly of adjusted reds/greens/blues GBP swap fly, keep 10s20s gilt flatteners
- Eonia curve prices 15bps of rate cuts by late 2017/early 2018; reds, greens are expensive on EONIA curve relative to policy rate projections; keep reds/greens EONIA curve steepener
- In coming weeks, unlikely market will focus on ECB buying below depo floor; Bobl yields are expected to remain in tight range; recommend selling 133.50/133.75 Sep. 16 Bobl strangles
- Deutsche Bank (strategists including Francis Yared)
- Resilient economic, financial conditions in Eurozone should lead ECB to opt for conservative QE extension in Sept.
- Maintain bearish bias, but redistribute risk to reflect central banks’ outlook, relative valuations: market expectations of rate cuts have reduced over past week but belly of the curve remains rich, move short March-17 Eonia to a paid position in EUR 5Y swaps
- Market had expected some indication of changes to ECB QE program; maintain view that an increase in issue limits remains most likely change, maintain Bund ASW spread widener
- Carney’s focus on need for easing, together with appetite to act preemptively, suggests maintaining long August MPC; potential for full front-loading of policy is now more limited after recent more hawkish tone; 5s10s looks extremely flat, recommend UKT 5s10s steepeners
- Citi (strategists including Harvinder Sian)
- Remain long duratio;, BOJ is an important reason to reset longs (BOJ delivery will restart global yield hunt), have met target on 5y5y swaps at 0.70/0.75%, still see scarcity value in long-end Germany as key trade
- Country level PSPP data on Aug. 1 could be a signal on the sanctity of capital key, continue to believe that lifting non-CAC limits is first option; should allow bunds to rally
- Bund scarcity will continue to feature, means bund ASW looks too cheap; buy OATs as they win if next ECB move is to lift 33% limit; lift in non-CAC limit only buys ECB a handful of months, periphery still set to benefit in longer-run
- Skeptical of the value of more rate cuts by the ECB given damage caused to banks; Draghi subtly signaling further easing is more remote against a curve that prices 14bps of easing; hold short 1y1y OIS from -0.52% (now -0.48%)
- UBS (strategists including John Wraith)
- Forecast gradual rise in 10y bund yields to 0.15% at end-2016; rather than take outright duration risk in core markets, prefer maintaining short 10y bund vs USTs, 30y bund vs gilt
- Event risk in Italy leads to recommend selling 10y Italy vs USTs, targeting a move to flat spread; also tactically recommend selling 10y BTPs outright
- On the curve, see forward path of 10s30s on EUR curve as much too flat; favor steepeners, preferred option is 4y forward
- Final underweight Germany recommendation is to continue to sell 25y Bunds vs OATs; expect pattern of Japanese investors diversifying into higher yielding OATs to persist
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Cagdas Aksu (Barclays PLC)
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
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