EU RATES ROUNDUP: Cashflows Trump Political Risk; GBP Steepeners
(Bloomberg) -- Analysts’ focus remains on large negative net supply in coming weeks. Some continue to favor Italy despite political risks, given ECB QE expansion and TLTRO-II impact.
- Bias toward gilt steepeners as long-end supply is front- loaded ahead of U.K.’s referendum on EU membership in June
- RBS (strategists including Giles Gale)
- Supply front-loading from govts has passed; QE now accelerates and should take over from risk-off as a driver of bunds; expect periphery to perform
- “Brexit” uncertainty is underpriced; recommend short Ireland, Netherlands vs Germany as Ireland most susceptible to a vote to leave EU and Netherlands also highly exposed
- Recommend 5s30s gilt steepeners; GBP to see further cheapening pressure, which may increase inflation; rate-cut expectations can rise further
- France to stay supported by Japanese demand, large coupons and redemptions
- Remain positive Italy, don’t see risk to BTPs from Italian banks; QE, TLTRO-II to be strong support for periphery generally; recommend buying wings on BTP 5s10s15s fly, as a forward flattener
- Barclays (strategists including Cagdas Aksu)
- Domestic political risks in euro area have returned to EGB market and likely to easily offset backdrop of positive short-term cash flow
- Maintain short 50% 7Y Belgium, Ireland vs Netherlands; short 6Y Belgium vs Austria
- Continue to hold indirect short duration bias via short bund ASWs vs EONIA, short 10Y bunds vs Treasuries; see 10Y German yields ~40bps at end of 2Q
- Money-market curve already price in further 10bps of depo rate cuts by year-end; following recent rally, recommend tactically paying 1Y1Y Eonia fwd
- Gilt supply in April, May is very heavy compared with prior years, weighted towards ultra-long end; recommend using upcoming supply to initiate gilt 2045/2065 steepeners, target -5bps
- Deutsche Bank (strategists including Francis Yared)
- Latest decline in nominal rates hard to explain on fundamentals, data remains consistent; inflation breakevens not responding to ECB stimulus, widening in peripheral spreads shows further squeeze in nominal yields cannot be ruled out
- Widening of periphery spreads probably related to upcoming deadline for some of the smaller Italian banks to raise additional capital
- Market now prices a further 10bps of depo rate cuts, despite significant indications from the ECB that it’s unlikely to cut rates under current conditions
- Maintain long EUR breakevens as preferred expression of lower real yields
- Gilt issuance is front-loaded over April, May; long-end supply is likely to require further concession, see potential for a repeat of supply congestion seen in late Feb.; recommend underweight U.K. long-end, short 50Y spreads
- Morgan Stanley (strategists including Alexander Wojt)
- Remain neutral duration on bunds as valuations looking increasingly stretched with ECB having limited the markets’ perceived risk of further rate cuts ahead
- Morgan Stanley’s Bond Market Indicators are likely to go short at the first sign of weakness in core rates
- Historically short-end, belly of OAT curve richens vs bunds around April coupon, redemption dates for OATs; suggest investors go long 5Y OATs/Bunds as April 25 approaches
- Commerzbank (strategists including Benjamin Schroeder)
- Hunt for yield should eventually extend to the periphery, proving the current sell-off is temporary
- Retain preference for BTPs vs the rest of the periphery as the TLTRO-II should continue to keep investor focus away from bank concerns and toward political risks
- Remain tactically neutral on duration, re-enter longs at 10Y bund yields above 0.25%: MORE
- BNP Paribas (strategists including Eric Oynoyan)
- Expect 10Y German yields to transition below 0% and knock-on effect could be a flattening of EUR 10s30s, generalized demand for positive-yielding global rates products
- Use flatteners through the OAT 5s15s segment
- Re-enter 10Y OAT/bund narrower in the high 30s or low 40s
- Enter BTP 10s30s flatteners: MORE
- Citigroup (strategists including Harvinder Sian)
- Bund yields will probably reach new lows, with preferred models showing negative 10y yields and pointing to wider ASW
- Receive EUR 5y5y swap; expect to reach 0.70%, from entry at 1.04%; stop above 1.27%; 3-mo. carry and roll worth 4.9bps
- Domestic investors own as little bunds as they have to own, meaning ECB buying can run up against scarcity: MORE
- BofAML (strategists including Ralf Preusser)
- ECB has shifted from negative rates to forward guidance, expect carry and roll-down trades to perform; 5Y is cheap cross market on the curve, will stay richer than implied forwards
- See value in sub-5Y periphery; expect bull-flattening trade to remain intact through April given record negative net issuance, accelerated ECB buying
- Favor short gilts vs bunds on a “Brexit” scenario and amid diverging supply dynamics over the next month; DMO to front-load supply in April, May ahead of June referendum
- Maintain front-end steepener GBP swaps vs EUR; current pricing inconsistent with expectations of policy divergence between the BOE and ECB
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Alexander Wojt (Morgan Stanley)
Benjamin Schroeder (Commerzbank AG)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Francis Yared (Deutsche Bank AG)
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