EU RATES ROUNDUP: Risk Sentiment Improves; March ECB in Focus
(Bloomberg) -- Mixed views on EUR rates from analysts this week; focus on recent stabilization in risk assets and outlook for March ECB meeting.
- Deutsche Bank (strategists including Francis Yared)
- ECB may optimize negative rates, while reducing costs to banking system; could remunerate large amount of excess reserves at refi rate, widen refi/depo corridor
- On futures rolls, bearish on German contracts bar Buxl, given long positioning; bullish BTP roll given likely rolling of short positions used as a hedge for credit exposure
- With the latest EU referendum negotiations coming to a head, add UK FRA-OIS wideners vs Europe as UK should continue to face Brexit-related stress while European basis tightens into March ECB
- Maintain U.K. risk premium normalization trade (5s10s steepeners vs 2s) as weakness in sterling continues to offset inflation pressures; maintain 10Y UK breakevens, which remains cheap vs models
- Barclays (strategists including Cagdas Aksu)
- Risk assets have stabilized, U.S. and U.K. forwards are selling off while German rates have lagged; EUR rates market may be nervous about upcoming ECB meeting
- If risk assets continue to rally, difficult for EUR rates not to follow a rates selloff; don’t expect ECB to deliver very bold QE package; swapped issuance may also pick up
- Recommend selling bund ASW vs Eonia to position for a rise in longer German rates, currently -11.5bps; target up to 6bps of tightening: MORE
- Goldman Sachs (strategists including Silvia Ardagna)
- German bund curve should continue to flatten as extension of ECB QE would reinforce concerns about ‘scarcity’ of bunds if the technical parameters of the program are left unchanged: MORE
- Citigroup (strategists including Harvinder Sian)
- Given prospect for further changes in Finland’s rating and the larger RAGB market, prefer 10yr Austria
- Buy RAGB 3.4% Nov. 2022 vs DSL 3.75% Jan. 2023s at 9bp; target 3bp, stop 12bp, with the speed of the recent move looking overdone; risks to trade include unexpected Austrian supply or a return to flight-to-quality flows in more liquid, higher-rated markets
- Credit Suisse (strategists including Florian Weber)
- Best positions ahead of ECB’s March meeting are a combination of EUR curve flatteners, long-carry trades in the periphery and short core rates via selling OTM bund calls
- EUR 5s7s and 10s15s are trading too steep
- In the periphery, favor being long the best carrying parts of the curve, such as 5s or 7s: MORE
- BNP (strategist including Eric Oynoyan)
- Expect PSPP expansion to support EGB spread tighteners vs bunds; recommend long 10y OAT and 20y ATS, and long 30y BTP in the 10y/30y box to bunds
- Reduce exposure to market direction now; will enter longs once bunds become attractive: MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Francis Yared (Deutsche Bank AG)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Florian Weber (Credit Suisse Group AG)
Harvinder Sian (Citigroup Inc)
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