EU RATES ROUNDUP: TLTRO-II, Net Negative EGB Supply for April
(Bloomberg) -- Analysts focus on market implications from latest round of LTROs, large negative net EGB supply for April as a result of redemptions, greater ECB QE buying.
- Deutsche Bank (strategists including Francis Yared)
- Current global monetary policy environment remains conducive of carry trades in EUR fixed income, though valuations becoming increasingly challenging
- Exit German 10s30s flattener; turn bullish on 10Y bunds via 162.5/163.5 1x1.5 call ratio, costs 18 cents, expires April 22, maximum payout with yields approaching last year’s lows
- Hold long 5Y Italy; target 5Y Italy/Germany spread of ~40bps seen in late 2009, implies further 15bps rally in 5Y BTPs
- RBS (strategists including Andrew Roberts)
- EMU QE, plus new TLTROs will outweigh net supply; leaves up to EU1.6T of bond buying from the street; bias towards lower yields across the curve
- FOMC is going to deliberately leave the “taps open”, curve should steepen, rally in short-end; 5s30s steepeners in the U.S. boxed vs EUR, pays roll of 2.4bps per 3-months
- More ECB action expected, QE and rate cuts, will push investors further out the curve; see further 20bps of depo cuts by year end; EU80b/month asset buying only serves to squeeze all markets, mostly bunds
- Non-uniform distribution of corporate purchases could reduce purchases of sovereign bond markets, most likely to suffer is Netherlands; recommend short 10y Netherlands on credit fly vs. Germany and Austria
- Nomura (strategists including George Goncalves)
- Central bank heavy week has passed, no real govt supply ahead, markets will be digesting the recent moves, need fundamentals to continue to improve for confidence to return
- Expect flattening pressure, 30y outperformance to prevail, risk of scarcity pricing is returning; close received 5s10s30s EUR fly, scale into 10s30s flatteners
- Recent Praet comments underlined that ECB could cut the deposit rate again if need be, which is more specific, less dismissive than Draghi’s words
- BNP Paribas (strategists including Laurence Mutkin)
- Expect the market’s bullishness to lead to curve flattening with the front-end anchored by the prospect of ECB status quo on rates for a while
- Expect bull-flattening bias to develop, at least up to the 7-10y area
- Receive EUR 10y swap outright; target 0.40%, stop 0.68%, 1- mo. carry +0.4bp
- Receive EUR 2s10s30s fly; target zero, stop at 30bp, 1- mo. carry +1.7bp: MORE
- Morgan Stanley (strategists including Alexander Wojt)
- Given weak inflation outlook, highly unlikely the ECB can alter its policy course significantly for some time; expect further 10bps depo cut by Sept., marginally more aggressive easing than is currently priced by the market
- April has most negative net issuance number for over 5 years, on both QE-adjusted, unadjusted basis
- High redemptions, unusually large government bond purchases should provide broad support for EGBs in the near term; maintain long 5Y BTP vs Bunds, recommend new longs added in 12Y-15Y BTP
- Based on historic relationship, 10Y gilts are unusually rich vs USTs; expect gilts to underperform; recommend going long 10y USTs vs. gilts via futures; key risk to trade is potential for brexit concerns for support gilt, Fed turns more hawkish
- Commerzbank (strategists including Michael Leister)
- ECB QE increase will push remaining net supply deeply into negative territory, PSPP purchases fully absorbing gross supply from core issuers, triggering sustained tightening pressure on spreads
- Netherlands’s strong fundamentals and ratings outlook looks particularly attractive for strategic convergence vs bunds: MORE
- SocGen (strategists including Vincent Chaigneau)
- Close G-4 duration longs as dovish Fed adds fuel to the risk rally, supporting USD pullback, higher commodities
- EUR rates should continue to hold up strongly, supported by increased QE buying, collapse of net supply in April, political risks in periphery
- Despite general positive tone in markets spurred by dovish central banks, Brexit risks and increased ECB purchases also present bullish case for long-end EUR rates: MORE
- Citi (strategists including Harvinder Sian)
- Peripheral bonds should benefit from a carry trade via TLTRO-II; not as aggressive as previous TLTRO iterations, carry and roll not as attractive
- Remain bullish duration, expect central bank focus on inflation credibility augurs lower yield activity on a global basis
- ECB balance sheet expansion has not been priced into real rates, room for a rally into 3Q 2016, favoring periphery holdings, even if the TLTRO-II carry trade is not profound
- Month-end extension +0.06Y, broadly supportive for EGBs; Spain to be most supported due to weighted duration change; index changes also to support 10Y Finland, Netherlands, 30Y Belgium: MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Francis Yared (Deutsche Bank AG)
Alexander Wojt (Morgan Stanley)
Andrew Roberts (Royal Bank of Scotland Group PLC)
George Goncalves (Nomura Holdings Inc)
Harvinder Sian (Citigroup Inc)
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