Few Reasons to Be Long Periphery Bonds in Months Ahead, MS Says
(Bloomberg) -- Long positions in the periphery over the next two months don’t make much sense as there are a number of events that could provide headline risk, Morgan Stanley analyst Jesper Rooth says in interview.
- May be moving away from the supply story that has been driving spreads over past couple of months
- Peripheral spreads didn’t come in an awful lot even though April had the most negative net supply on record; the failure to rally more than they did is a sign of weakness
- Among the looming risks on the horizon:
- The negotiations around fiscal targets between govts and the EC could create some headline risk, but not overly concerned about it
- More important will be the election in Spain; the reason the political situation maybe hasn’t received more attention so far is that the budget was set before the December elections
- Next year they will have to negotiate a budget whatever the constellation in parliament is and that may become more of a focus toward 2H
- ECB purchases in April show the share of purchases in Ireland and Portugal did fall a little bit; could reflect liquidity factors or them having reached the issue share limit in certain securities
- The ECB has been buying more govt bonds because the corporate bond-buying program hasn’t started yet; we don’t know how much the start of that scheme will cannibalize EGB purchases
- Expect the central banks would like to buy as many corporate bonds as they can to ensure they can continue sovereign bond purchases under the current rules for longer
- In the short term, there’s a possibility that the corporate bond-buying program surprises positively, which would steal some demand away from the EGB program; further out, they may move away from the capital key, which would be positive for the periphery
- Market appears to have built in expectations that ECB QE will extend beyond March 2017 and the GC will likely have to address that, probably in September, by offering more clarity on how they will resolve the current limits on buying
- Some of this uncertainty is already reflected in the price
- If any of the risk events were to produce a negative outcome, curves may start flattening in a sell-off, reversing the recent trend where we have seen use of flatteners in a rally and steepeners in a sell-off
- The curves in France, Belgium, Austria look very steep as do the credit curves for those countries, so favor buying 30Y sector in semi-core vs core
- Calculates the three sovereigns have already issued around 70% of what MS estimates they will issue in 15Y and higher maturities in 2016; long-end supply largely behind is suggesting spreads will start tightening
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