EU RATES ROUNDUP: Analysts Lean Toward Neutral Rates Duration
(Bloomberg) -- Many analysts are neutral on EUR duration as markets await next ECB meeting on March 10.
- Morgan Stanley (strategists including Matthew Hornbach)
- Remain neutral on G-4 sovereigns; acknowledge weaker data, large month end duration extension, though suggest current valuations, high bar for ECB to surprise makes case for neutral EUR duration
- In RV, see value in long 15Y-20Y sector, trades cheaps vs 10Y, 30Y; is at peak of forward curve, offering best value for received position
- Recommend receiving 20Y vs 10Y, 30Y; target 10bps, stop 25bps
- U.K. rates should be pricing in more premium for risk Britain votes to leave EU; If U.K. leave, market should price slower pace of hikes for U.K. than in U.S.
- Recommend Dec. 16/17 short-sterling flatteners vs Dec. 16/17 Eurodollar steepeners; target 16bps, stop -7bps
- JPMorgan (strategists including Fabio Bassi)
- Given dovish ECB outlook, potential relaxation of QE rules, recommend staying long 3Y Germany; maintain 10s30s flattener bias
- Stay neutral intra-EMU spreads; in core RV, recommend entering 5s10s Belgium flattener vs. France
- In peripherals, hold short 30Y SPGB vs BTP, also short 30Y IRISH vs OAT as both Spain and Ireland face political uncertainty
- Swap spreads too wide vs fundamental drivers, expect swapped issuance to pick up in March; initiate Bund/Buxl weighted swap spread curve steepener
- Citi (strategists including Harvinder Sian)
- Bund yields likely to test and break lows; little value at the front-end where the ECB deposit rate is priced below -50bp
- Not initiating shorts because “ECB chatter” about the tiering of deposit facility can maintain pricing and push forwards in the 3-yr+ even lower
- Recommend EUR 6m10y 0.50/0.35/0.20 receiver ladder: MORE
- Deutsche Bank (strategists including Francis Yared)
- Tighter financial conditions in Europe being reflected in weaker business surveys; absolute level, good Jan. credit data reduces likelihood of the most aggressive forms of credit easing
- Market pricing 25bp depo. cut from ECB, implicit extension of QE by 6-months, ~EU10b increase in pace; front-end is fully priced
- Maintain long BTP as traditional easing measure supportive of peripheral markets
- In U.K., recent long-end selloff a function of supply indigestion; recommend short 5Y on 2s5s10s UKT fly to fade recent richening ahead of supply
- RBS (strategists including Giles Gale)
- PMIs signal more bad economic news globally; remain high conviction short credit, stocks, EM, commodities; add short peripheral bonds; favor longs in U.K., Germany, U.S.; best risk/reward in roll-down trades
- German insurance liabilities highly convex, average duration gap large; insurers under pressure to keep duration mismatches under control, expect callable demand to encourage receiving as far out as 50Y
- Base case for no govt coalition in Spain, new elections June 26, three days after U.K.’s EU referendum; risk events to put pressure on SPGBs, triggering repricing vs 10Y BTPs, 5s10s SPGB steepening
- Recommend long 10Y BTP vs Spain; currently 10bps, target 25bp, stop at 4bps
- Irish govt bonds remain exposed to political uncertainty, global risks (e.g. U.K.’s EU referendum), though short-end to remain supported by buybacks, lack of supply
- Recommend Irish 3s10s steepeners; currently 98bps, target 115bps; stop at 90bps
- HSBC (strategists including Bert Lourenco)
- Pressure mounting on ECB as inflation expectations continue to fall, peripheral spreads under pressure
- Continue to expect curve flattening; still like receiving 10Y-15Y sector on the curve, 10Y sector can also benefit from macro risk-off scenario given likely pull toward liquidity
- More QE could help periphery, particularly Italy; political uncertainty remains a concern in Spain
- UniCredit (strategists including Michael Rottmann)
- Don’t expect strong move lower in USD, EUR zero-coupon inflation swaps as have decoupled from any reasonable medium-term inflation forecasts, realized inflation
- Start accumulating a starting position in 5Y5Y USD and 5Y5Y EUR ZC inflation swaps at around these levels; in cash, ultra-long breakeven inflation in Italy and Germany attractive
- Expect euro-area core inflation in 1Q 2017 at 1.1% with headline inflation at 1.3%: MORE
- Barclays (strategists including Cagdas Aksu)
- “Buying the dip” might not work as well as it has over the past few years for EGB spreads, especially peripheral bonds
- Scenario has changed due to the poor global macro backdrop, the reduced capacity of “more of the same” ECB easing to surprise positively, domestic political and U.K. referendum risks, and positioning
- Recommend short 50% Ireland and 50% Belgium vs Netherlands in 7y as a low-downside U.K. referendum trade, given that EGB spreads price in little risk premium for this: MORE
- BNP (strategists including Eric Oynoyan)
- Upcoming euro-area consumer price data will show that inflation is back to negative territory, which could support expectations for ECB rate cut; keep receiving 2Y EUR swap
- Risk of a significant re-steepening correction is very low in the near term, but bull-flattening could lose some momentum in the weeks ahead: MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Matthew Hornbach (Morgan Stanley)
Bert Lourenco (HSBC Securities Inc)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Fabio Bassi (JPMorgan Chase & Co)
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