EU RATES ROUNDUP: EGB Supply to Moderate; Constructive on Gilts
(Bloomberg) -- Analysts focus on the moderation of supply expected in coming quarter, following a period of heavy long-duration syndicated issuance.
- JPMorgan, Morgan Stanley, Deutsche bank all constructive on gilts through various trade expressions
- Morgan Stanley (strategists including Anton Heese)
- Continue to suggest investors remain neutral duration across G4 bond markets; maintain long UST 5Y vs short 10Y bund
- 10Y gilt has underperformed USTs by 15bps-20bps in recent weeks, apparently due to a moderation of Brexit risk premium, supply concession
- Fair value suggests 10Y gilts are ~10bps cheap to USTs, recommend long gilt 10Y vs 30Y UST; target long-end USTs as 10Y point expected to benefit from Japanese demand
- Whole core, semi-core long-end looks too steep vs Germany; heavy issuance has passed, see potential for long end to outperform, Austria offers most value
- Recommend long 30Y Austria vs Germany
- Deutsche Bank (strategists including Francis Yared)
- Cheapening of real rates, curve steepening partially driven by significant supply; seasonal patterns show reduced supply from May-August, should reduce pressure on real rates
- Case for long-end flatteners in France remains compelling as long-end supply abates
- Recommend using recent steepening of BTP curve to enter 5s10s flattener vs Germany; valuations attractive, also benefits from less supply
- No scheduled conventional gilt issuance until May 18, should provide tactical support for gilts on a cross market basis, recommend long 5Y5Y UKTs vs USTs
- JPMorgan (strategists including Fabio Bassi)
- Threat of higher interest rates has diminished, re-enter 10s30s bund flatteners, roll long positions in Jun16 ECB OIS to Sep16 OIS as a cheap hedge
- Turn tactically negative on intra-EMU spreads given increased headline risk given Brexit referendum, Spanish elections, failure to provide a clear backstop to concerns about the Italian banking sector
- Close long 10Y Spain vs Germany, enter short 2Y Spain vs Germany
- Risks of increased EU referendum uncertainty, weaker U.K. output data, shift to a tactical bullish duration bias on gilts, recommend long 10Y gilts vs USTs
- Barclays (strategists including Cagdas Aksu)
- Potential bearish triggers for bunds are losing momentum; syndicated issuance pace to fall, ECB to remain excessive buyer of EGBs in May
- Close short bund ASW vs Eonia trade, which has a bearish bias
- Maintain short 10Y bunds vs USTs, should perform in both a bearish and bullish environment and is a positive carry trade
- Recommend short 20y Bund ASWs on the 10s/20s ASW box; ECB gradually extending purchases on the curve, 10Y should be benefiting at least as much from this relative to the 20Y, carry and roll profile of the trade is also attractive
- Remain cautious on peripheral spreads, will find it difficult to tighten meaningfully given risks associated with the upcoming EU referendum, domestic political issues
- RBS (strategists including Andrew Roberts)
- BTP spreads should start tightening as supply slows; QE will buy at least another EU90b; TLTROs on June 24 can offset uncertainty from UK/EU referendum (June 23), Spanish elections (June 26), Greek negotiations
- Italian banks to remain persistent issue, but flows may turn out to be supportive for BTPs; recommend long 10Y BTP vs Germany, target 100bps
- Global PMI data shows a gradual turn down, maintain bullish bonds view; 10Y bunds to return to set a new low yield in next 1-2 weeks
- Citi (strategists including Harvinder Sian)
- Bias remains for a test of yield lows across markets, with the possible exception of JGB
- Enter OAT 10s30s flattener vs bunds; see little reason for the box spread to trade near the wides given persistent yield grab and 30Y France is still near an attractive 1.50%: MORE
- BNP (strategists including Eric Oynoyan)
- Very likely that peak in bund yields has been seen around 0.30%
- Recommend using any move close to 0.65% as an opportunity to re-enter EUR 10y swap receiver with medium-term target of 0.25%
- Maintain thesis that in ultra-low yield environment, carry becomes increasingly valuable
- Carry is highest in sub-5-year U.S., around 5y in U.K. and in 5-10y in EUR: MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anton Heese (Morgan Stanley)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Fabio Bassi (JPMorgan Chase & Co)
To de-activate this alert, click
hereUUID: 7947283