EU RATES ROUNDUP: Focus on Recent Trend of Ultra-Long Issuance
(Bloomberg) -- Recent trend of large ultra-long syndicated sovereign issuance is now in focus, published research shows; a couple of banks are recommending trades to benefit from potential Italy 50Y syndicated bond.
- JPMorgan (strategists including Fabio Bassi)
- Keep a bias for lower 2Y German rates; possible Italy 50Y would likely be the last ultra-long supply for some time; maintain German 10s30s flatteners
- Hold intra-EMU widening exposure, given uncertainty over Brexit, Spanish elections, European Commission assessment of fiscal plans in some countries
- Austria 10s30s flatteners are attractive as curve trades ~5bps-6bps too steep vs recent history, given level of German 10s30s
- Recommend BTPs 10s30s steepener vs Spain, would benefit from launch of new 50Y BTP, 10Y Bono in coming weeks
- Recommend fading the expensiveness of short-end Spain, sell 2Y SPGB vs Germany, Italy
- Deutsche Bank (strategists including Francis Yared)
- Low-yield environment remains supportive of ongoing long-end syndicated supply from European sovereigns; allocations shows high demand from ALM investors
- Maintain long 10Y breakevens in EUR; economic growth above trend, risks to May HICP prints on the upside, valuations below forecasts
- U.K. data already showing signs of weakness; in “Leave” scenario, MPC may ease sooner than currently priced for Dec.; in “Remain” scenario, money-market curve would need to reprice; recommend Sept. 16/Mar 17 MPC Sonia steepeners
- Morgan Stanley (strategists including Anton Heese)
- Long-end of Germany shows minimal steepening in reaction to new long-end issuance; impact being seen in long-end credit curves, BTP 10s30s vs Germany showing ~15bps cheap
- Initiate longs in semi-core vs periphery, should be supported if Italy decides to issue a new 50Y bond; recommend long 30Y Austria vs BTPs
- No longer suggest investors hold long UST 5Y vs German 10Y; maintain long gilts 10Y vs USTs, though recommend moving to short 5Y UST to maximize performance of the trade
- RBS (strategists including Andrew Roberts)
- Maintain long high-quality bonds (U.S., Germany, UK, Australia, Japan, Sweden), short equities; continue to target -0.10% in 10Y bunds, best long in Europe
- 10y France no longer attractive for an FX-hedged Japanese investor as has tightened so far, expect Japanese investors get forced along the curve into 20y, 30y assets
- TLTRO-II on June 24, will be enormous at EU1.7trn; If no UK/EU referendum, would be bulls of semi-core and periphery; event risk on the horizon suggests favoring bunds, not OATs
- Barclays (strategists including Cagdas Aksu)
- Difficult for bunds to sell off materially as the U.K. referendum date gets closer
- No new monetary policy easing due near term, euro inflation outlook lacking positive momentum ultra long- end EGB issuance likely to slow down, bund yields will hold in short term
- Maintain short 10Y bunds vs USTs, short 10s/20s German ASW box, receive EUR 5y5y/5y10y/5y15y fwd, tactically pay 1y1y fwd EONIA trades
- Commerzbank (strategists including Christoph Rieger)
- Outlook for spreads remains challenging, political risks reemerge as dominant driver; major risk events until June argue for defensive stance in EGBs vs bunds
- Stick with strategic overweights in the Netherlands vs Finland, Austria; maintain tactical longs in 30Y Belgium vs France as issuance slows
- BTPs most attractive within peripherals; 10Y SPGB/BTP spreads at the bottom of range, plenty of scope for repricing as Spanish election unlikely to deliver clear- cut outcome
- Citi (strategists including Harvinder Sian)
- Recommend buying USD vs EUR rates mid-curve as expect savings-glut factors and an international transmission of liquidity taps to drive USD rates lower vs EUR: MORE
- Heavy swapped-issuance flows have driven widening in EUR 3s6s basis; 3Y2Y has moved most aggressively, now look for compression between 3Y2Y and 10Y 3s6s basis
- Increase in supply DV01 has been main driver of periphery spreads; 10Y BTP/Eonia is approaching widest lvls seen since Greek political crisis
- Like long 10Y BTP when BTP/Eonia hits 200bps (equiv. 1.65% BTP yield)
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 0629846D BB (European Commission)
People Fabio Bassi (JPMorgan Chase & Co)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Christoph Rieger (Commerzbank AG)
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