EU RATES ROUNDUP: Neutral Duration Bias; Bias Toward Flatteners
(Bloomberg) -- Most analysts are neutral on duration; small curve bias toward long-end flatteners as recommended by RBS, JPMorgan and Deutsche Bank, though rationale varies.
- RBS (strategists including Andrew Roberts)
- 10s30s in Europe looks too steep given spread directionality, models, analysis of detailed drivers; recommend 10s30s flatteners in bunds, initiate 69bps, target 55bps
- Remain bullish on bunds despite approaching rate hikes in U.S., still buyers of bond duration, global inflation (ex-U.S.) is shocking to the downside
- Favor lightening up on periphery positions into EU referendum vote; see outcome as‘too close to call’ view, clear bias for lower haven bond yields globally
- Investor base is generally short fixed-income duration, visible by the sharp rally in 10y Gilts primarily driven by short covering
- JPMorgan (strategists including Fabio Bassi)
- Maintain 10s30s flatteners on pressures from QE purchases, limited supply; hold bias for lower 2Y rates but hedge the risk of a rebound in intermediate yields with 6s14s Bund steepners
- Focus on intra-EMU Brexit hedges; short 3Y Ireland vs France, 2Y Portugal vs. Italy, Spain vs Germany, 6Y-7Y Austria vs Netherlands, short-end Belgium vs other core countries
- See risks of increased EU referendum uncertainty over coming weeks; enter tactical longs in 1Yx1Y SONIA
- Enter level-adjusted 10s30s gilt curve steepeners as the long-end looks rich, curve too flat
- Citigroup (strategists including Harvinder Sian)
- Bunds can rally further as large chunks of the ECB pool become ineligible for QE, forcing ECB/Buba duration extension
- Rally has taken German 5y below the -40 bps depo, making it ineligible; this adds to the EUR flattening bias as EU59b by market value drops out of the QE pool: MORE
- EMU spreads saw muted reaction to ECB, expect lack of supply, politics to dictate the market tone; remain long Italy vs Spain
- Recommend going long USD spread floor funded via EUR payer swaptions: MORE
- Deutsche Bank (strategists including Francis Yared)
- Repricing of Brexit risk led U.K. front end to flatten, now looks rich relative to the U.S. given the likely inter-dependence between the outcome of the referendum, Fed outlook
- ECB was in line with expectations, maintaining easing bias but hurdle for further cuts has moved out slightly; increase long-end flattening bias by rotating the Italy 10s30s spread flattener to an outright flattener
- Maintain France 10s30s flattener, local peak in the supply response, should perform in a risk-off
- Morgan Stanley (strategists including Anton Heese)
- Hold Brexit hedge in the form of long 10Y gilts vs UST 30Y; remain long UKTi 30Y to position for lower real yields in the U.K.
- See little evidence of PSPP struggling to find ready sellers; partially because it is uneconomic for many investors to own bunds
- TLTRO 2 expectations starting impact the market, causing richening of sub-5Y part of peripheral curves; lower funding costs present possibility that some banks look to buy government bonds as a carry trade
- Recommend long BTPei 09/2021 on ASW to benefit from continued richening of this portion of the curve, offers 20-30bps yield pick-up on Iota spread
- Barclays (strategists including Cagdas Aksu)
- Bunds will struggle to sell off materially in near term; EU referendum, euro inflation outlook lacking positive momentum, ultra-long-end EGB issuance likely to slow
- Stay neutral on peripheral spreads, continue to like core/semi-core trades with limited potential downside but that offer good upside spreads become vulnerable, such as short 6Y Belgium vs Austria
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Topics BFW EU Rates Analyst Wrap
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