EU RATES ROUNDUP: Opportunities Amid Net Negative EGB Issuance
(Bloomberg) -- Analysts focus on opportunities amid large net negative EGB supply in April and do not expect a selloff in duration, seen in April 2015, to be repeated this year.
- JPMorgan (strategists including Gianluca Salford)
- Hold longs in 3y Germany, 10s30s flatteners and intra- EMU compression exposure
- Tightening view in the short term on combination of favorable macro developments in the region, increasing QE purchases, limited headline risk, heavy April redemptions, more attractive valuations as peripheral spreads have underperformed other credit products in Q1 2016 in relative terms
- Do not expect the ECB to address scarcity in 2Q 2016 underpinning long Germany trades for a while
- Spread compression view is tactical in nature given the expected increase in uncertainty into the Brexit vote and likely second election in Spain
- Goldman Sachs (strategists including Francesco Garzarelli)
- Anticipate sovereign spread compression given the technical support to the mkt
- Expect 10Y Italy/German spread to go back below 100bps
- Especially during April, principal redemptions estimated at ~EU120b and coupon payments of ~EU22b will be seasonally high
- Expanded ECB purchases will step up demand for euro-area public sector securities considerably given it’s not until end-June that national central banks will start buying non-bank corporate bonds
- Morgan Stanley (strategists including Matthew Hornbach)
- Expect 2Q net negative issuance of EU100b (adjusted for QE)
- 2Q redemptions are heavily skewed toward April and come at a time ECB is ramping up asset purchases, with a temporary additional skew toward EGBs in particular
- Demand/supply dynamics are especially favorable for Germany, Netherlands and Italy
- Hold on to BTP longs at least until April 15, with weeks beginning April 11 and April 25 exhibiting significant negative net cash flows
- BofAML (strategists including Mark Capleton)
- ECB minutes in focus this week, watch for any discussion on bond scarcity
- Recent recovery in oil prices and stabilization of EM currencies may reduce pressure on reserve managers and selling to the ECB may slow as a result
- With banks reluctant to step in and provide a significant source of bond sales, euro-zone central banks may eventually struggle to source enough bonds
- Short U.K. vs European ultra-long end on LDI demand ‘exported’ to the ultra-long end of Europe; sell 2060 Gilt, buy 2060 OAT; target 100bps, stop -20bps
- Risks are the lack of demand for OAT duration from LDI, sustained foreign demand for Gilt, or emerging concerns on the launch of a new 50y OAT
- Commerzbank (strategists including Christoph Rieger)
- With long-end yields back close to their lows, tactically scale back strategic duration longs at the start of the new quarter
- Add duration again at 10Y bund yields above 0.25%
- Maintain core and peripheral tighteners heading into the larger PSPP purchases, expressed via 10Y DSL vs bunds in core; 10Y Italy in peripherals: MORE
- BNP Paribas (strategists including Eric Oynoyan)
- Maintain long duration call for the coming months, target -20bp yield on 10Y bunds: MORE
- Continue to receive EUR 2s10s30s fly
- Even though 10Y core EGB yields are very close to 2015’s record-low levels, the valuation metrics for the 10Y and the curve are completely different: MORE
- Societe Generale (strategists including Marc-Henri Thoumin)
- Ultra-low rates environment and continuation of the bullish trend in EUR rates over April should fan the quest for return, thereby boosting appetite for longer duration
- April flows to support flatter ASW curves, tighter SPGB/BTP: MORE
- Value in buying EUR long-tail receivers vs JPY after the recent increase in JPY long-tail gamma: MORE
- UBS (strategists including Justin Knight)
- Position for steeper long-end core curves and tighter 10Y spreads to Germany
- Expect 10Y Italy-Germany to tighten to +90bps by year- end and 10Y France-Germany tightening to +25bps
- Recommend EUR 10s30s 4y fwd steepeners
- See value in buying 10Y USTs vs bunds given the differential in curve pricing
- Expect the belly of EUR 2s5s10s 1Y fwd to richen from current levels
- Danske Bank (strategist including Arne Lohmann Rasmussen)
- Compression trades are still offering value in a situation with strong support from the ECB and the general positive cash flow in April
- Stay long duration in April, not least after Janet Yellen confirmed the Fed’s dovish stance
- Long semi-core, Italy and Spain vs swaps
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Gianluca Salford (JPMorgan Chase & Co)
Arne Rasmussen (Danske Bank A/S)
Christoph Rieger (Commerzbank AG)
Eric Oynoyan (BNP Paribas SA)
Francesco Garzarelli (Goldman Sachs Group Inc/The)
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