Bund Yields to Continue to Fall, OAT 5s15s Flatteners: BNP
(Bloomberg) -- Expect 10Y German yields to transition below 0%, and knock-on effect could be a flattening of EUR 10s30s and generalised demand for positive-yielding global rates products, BNP Paribas strategists including Eric Oynoyan write in client note.
- Use flatteners through the OAT 5s15s segment
- Recommend entering long OAT May 2031 vs Nov. 2020 OAT spread at 108bp; target 70bp by summer, add on any move to 114bp, stop 124bp, 1-mo. carry of 0.4bp
- Allows investors to benefit from the upcoming bull flattening of the Bund curve and the cheapness of the 15y OAT after the recent 10bp widening of the 5s15s OAT/Bund box
- Re-enter 10Y OAT/Bund narrower in the high 30s or low 40s; target high 20s
- Spread has remained in a limited trading range since Dec. 2014 and expect this to remain the case as long as the PSPP continues
- Enter BTP 10s30s flatteners
- Buy BTP March 2047 vs sell BTP Dec. 2025 at 117bp; target 100bp, stop 125bp, carry -0.5bp per mo.
- Benefits in a Bund rally environment, both in risk-off and risk-on modes
- Maintain positive carry/roll recommendations: receive 10Y EUR swaps; 3Y forward 3s15s steepener in U.S.; long 5y5y EUR inflation; long AUD 3s5s10s
- Longer-term theme remains that with bond yields ultra-low, roll-down and carry become a more important driver of bonds than yield to maturity
- Central banks, in aggregate, probably have more easing to do
- Increased ECB QE and very negative net supply this month, together with ongoing BOJ QE, expected to keep downward pressure on yields globally
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HALISTER1Source: BFW (Bloomberg First Word)
Tickers BNP FP (BNP Paribas SA)
People Eric Oynoyan (BNP Paribas SA)
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