EU RATES ROUNDUP: ECB QE Discussion; Flatteners; BOE QE Trades
(Bloomberg) -- Analysts continue to focus discussion around potential changes to ECB QE rules; on the curve, bias remains towards flatteners.
- Focus on BOE this week, many recommend long positions in front-end MPC dates; Citi, Deutsche Bank add QE trades
- Morgan Stanley (strategists including Matthew Hornbach)
- Turn neutral on G4 duration; yields have fallen dramatically since EU referendum; momentum to lower yields remains supportive
- Equity market performance, poor volatility-adjusted carry weigh more heavily on prospect for positive excess returns in near future
- Gilt market is not yet fully priced for rate cuts, though has started pricing QE; bund market shows signs of additional QE being priced via much flatter yield curves since Brexit, suspect markets have taken it too far, too fast
- ECB QE can go on for another 6-7-months given current yields, rules; increased issue share limits, at least for non-CAC bonds, along with a soft move away from the capital key, would be an achievable compromise for ECB
- This should favor BTPs at the expense of bunds, continue to recommend tactical longs in IK vs RX
- JPMorgan (strategists including Fabio Bassi)
- Maintain longs in 3Y, 10s30s flatteners on Germany curve, predicated on notion that ECB will only respond to scarcity concerns in Sept.; don’t expect significant change in capital key allocation
- In EGB spreads, hold modest tightening exposure; peripheral bonds are too wide vs core, open longs in 3Y Spain outright, shorts in 10Y France vs. Spain and Germany; do not expect potential issuance of a 10Y benchmark Bono to hurt
- MPC to cut Bank Rate by 25bps this week, cut to be part of package of measures (including QE) over coming months; stay long Nov. 16 MPC OIS, long 10Y gilts, enter tactical long 10Y swap spread wideners
- Swap spread widened recently as crowded QE trades were unwound after speculation ECB will deal with bond scarcity
- Spreads now too narrow, biased for further widening given further scarcity, lack of swapped issuance activity over summer; recommend bund swap spread widener
- RBS (strategists including Andrew Roberts)
- With 30y bunds at 0.37%, 30y Japan at 0.10%, investors are fleeing into anything with yield
- Downward pressure on yields to continue given core inflation likely to fall, risk of further cut in policy rates, extension of QE, retention of flight-to-quality premium by bunds; recommend buying 10Y bunds at -17bps, target -40bps, stop at -0.05%
- Italy/Bund spread to compress; politics, banks a concern, though flows matter more with LTRO money, negative net issuance for remainder of the year, low yields driving search for yield
- Spain is preferred over Italy; fundamentals are better, political situation improving; recommend long 30Y Spain vs France and long 30Y Spain vs Italy
- ECB is increasingly forced down the curve, investors will be pushed this way too in search for yield; 30y bunds can go to zero (currently 37bps), favorite peripheral flattener is in Spain, 10s30s can hit 70bps (currently 104bps)
- Barclays (strategists including Rajiv Setia)
- Recommended 10y UST vs bunds over past quarter, maintain this view; Treasuries attractive in global context, latest rally in global haven yields is only likely to increase their appeal
- ECB looking to adjust parameters of QE, potentially reducing bund demand, should limit a rally
- ECB unlikely to rely on aggressive depo rate cuts; focus is to be on more QE (extension beyond March 2017), bolder credit-easing measures
- Outright duration outlook for bunds very volatile in coming weeks; EUR curve to remain directional, 10s30s bear-steepening during sell-offs, bull-flattening during rallies
- Deutsche Bank (strategists including Francis Yared)
- Market already pricing 9m-12m extension of ECB QE, changes to PSPP necessary; market under-prices risk of removing yield floor, and/or a shift in composition of purchases
- Deviation away from ECB capital keys, even if not a move toward weights based on outstanding amount of debt, should favor Belgium within semi-core countries at the expense of Netherlands; recommend going long 30Y Belgium vs Netherlands
- Recent rhetoric highlights risk that U.K. MPC will ease sooner rather than later; maintain long Sep. 16 MPC sonia and Dec. 17/Dec. 18 steepeners
- Low yield environment pressures pension funds, reduces likelihood of QE as initial policy response; measures may be taken to reduce impact of QE on long-end yields, offers more nuanced version of BOE QE, recommend long 15Y swap spread vs 30Y
- Citi (strategists including Harvinder Sian)
- Move to new lows in global bond yields is rightly pricing more central bank impotence, pricing can go further
- ECB QE flexibility in focus, ECB could hit 33% limit on bunds as soon as this month; see 5% probability of depo floor or capital key being removed
- See high probability, 45%, of raising purchase limit for non-CAC bonds, though low probability, 10%, of raising limit on all bonds; see 35% chance of reallocating portion of German PSPP purchases to other NCBs
- Gilt market is already well priced for rate cuts and recession, but not QE, recommend adding QE rates via receiving GBP 5F10Y vs 5F5Y and 15F15Y: MORE
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FIRST First Word newswire:
NH BFW
--With assistance from
Tanvir Sandhu.
To contact the reporter on this story:
Stephen Spratt in London at sspratt3@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net V. Ramakrishnan
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Matthew Hornbach (Morgan Stanley)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
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