EU RATES ROUNDUP: Limited Scope Seen for Large Bund Selloff
(Bloomberg) -- Many analysts see limited scope for a large selloff in bunds, though most continue with a neutral duration bias for now.
- Citi (strategists including Harvinder Sian)
- Bund selloff seen as tactical; keep an eye on the regulatory treatment of bank sovereign holding at the Ecofin meeting
- Enter EUR 2y fwd 10s30s steepener; target 40bp, stop 10bp, roll +14bp over 12 mos.
- Rationale for the trade is stable outlook for long end making carry trade attractive in forwards: MORE
- BNP (strategists including Eric Oynoyan)
- Closed outright EUR 10y swap receiver in light of the current correction in bunds, waiting for better levels to re-enter
- Heavy redemptions, coupon payments could slow the pace of the correction
- Current low premium on bunds suggests the 10y yield is unlikely to rise much above 0.30%: MORE
- Morgan Stanley (strategists including Anton Heese)
- Suggest investors retain a neutral-duration position in G-4 rates, hold trades that benefit from steeper yield curves globally, including UST 5s30s steepeners, short 10Y bund vs 5Y UST
- EUR rates in the near term to be impacted more by highly anticipated BOJ, political situation in Europe, EU referendum
- Given large upcoming coupon payments, index extensions in France, see further reason to stay long France vs Italy; maintain short IKM6 vs OATM6
- RBS (strategists including Andrew Roberts)
- Roll-down trades still offer great risk reward; disinflationary pressures persist, further ECB easing to come
- Recommend receiving 5Y fwd 1Y rate at 0.56%, target 20bps profit, stop 0.66%; offers positive roll down of 30bps in first year
- Constancio said changes to zero-risk weighting of govt bonds should be global agreement, removes fears of swift regulation change, bullish for periphery
- Expect take-up of over EU1t in LTRO-II, will be supportive for credit, periphery; EU100b-200b of funds likely to go into sovereign carry trade
- Deutsche Bank (strategists including Francis Yared)
- ECB on hold with dovish bias, as expected; risk assets remain vulnerable to repricing of rates, China’s switch to more prudent policy also represents a risk
- As a general risk-off hedge, recommend entering tactical France 10s30s flattener
- Recommend long 10Y EUR real yield vs USD, which is now at attractive lvls; exit the short 10Y gilt vs UST, maintain long cash breakevens in EUR and GBP
- Carney underlined readiness of the BOE to act should current uncertainty generate financial stresses; exit the GBP FRA-OIS basis widener
- Commerzbank (strategists including Markus Koch)
- EUR 3s5s7s IRS fly currently trading about 1.3 sigma below fair value; current fly spreads in EUR stretched across the IRS curve; recommend paying belly of 3s5s7s fly, PCA weighted
- Look to increase duration exposure again at 10y bund yields above 0.25%: MORE
- Barclays (strategists including Cagdas Aksu)
- Recommend investors do not rush to fade the bund selloff; use indirect duration trades such as short 10Y bunds vs USTs, short bund ASW vs Eonia to express a bearish bias on EUR rates
- Reason for short bias include: further ECB easing unlikely in near term, upcoming redemptions have been well flagged: MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Harvinder Sian (Citigroup Inc)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
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