Halister News

Economic Release Details: {GRIFPBUS Index ECOD} --JANA RANDOW

--RAMSEY AL-RIKABI

(Bloomberg) -- Flattener bias on the curve among strategists as oil falls, pushing inflation forwards lower. Deutsche Bank and Citigroup maintain flattener view, while Morgan Stanley take off breakeven steepeners.

• Focus on the sharp tightening in Schatz ASW, which analysts put down to cheapening repo rates, as reserve managers increase willingness to participate
• Caution warranted on peripherals, with little appetite to chase the recent tightening in Italy- German spreads

Citigroup (strategists including Harvinder Sian)

• Falling oil prices have outsized impacts on long-end breakevens and given high correlations to Bunds, Treasuries and gilts, this is bullish for long bonds
• Oil price creates bad optics for any ECB tightening as both U.S. PCE and European inflation are likely to be sub-1% in 1Q next year if current oil prices stick, just when ECB are presumed to be tapering
  • This should result in a larger-for-longer taper and will require further fudge of the capital key
  • As a give back to the hawks in this scenario, be alert to the language on rate-hike timing to become more bearish
• Long-end outperformance has been entirely consistent with the view that the inflation risk is driving yields; already hold 10s30s flattener and with swaps rate locking risk looking much more limited
  • Instead of vanilla EUR 5s30s flattener prefer a receive 3m25y vs 5y given more favorable roll, enter 121.2bps, target 100bps, stop 130bps
• In the U.K., recommend buy Nov, 2017 MPC Sonia at 35bps, target 22bp, stop 43bp; see rate hike this year unlikely given Carney’s relative dovishness and benign domestically-generated inflation

Barclays (strategists including Cadgas Aksu)

• ECB seems intent on moving the needle very slowly in changing policy guidance; remain short outright 10y Bunds alongside keeping other bearish expressions such as reds/greens EONIA steepeners and pay May 2018 ECB EONIA
  • Rationale is based on shallow ECB pricing, dovish stance amid solid growth which is bearish for the longer end through higher term premiums; ECB is beginning to move away from Bunds in capital key, tapering of purchases is on the horizon
• Don’t want to chase the tightening in ECB spreads, with Italian elections, ECB policy changes coming back into focus from Sept. onward, look for attractive levels to go short in 10y Italian, Spanish and French vs Germany
• In the U.K., rates are likely to sell off over the coming year, as recent political developments can lead to a ‘soft’ Brexit, while higher inflation and steady growth could mean the BOE continues to stay on the hawkish side
  • Find buying payer spreads to be attractive and recommend funding these by selling low-strike receivers; one zero-cost expression of this structure is to buy GBP 1y10y ATM+10/ATM+45 payer spreads vs 1y10y ATM-35 receivers

Deutsche Bank (strategists including Abhishek Singhania)

• Continue to hold German 10s30s flattener initiated on May 26, based on regression models which considerations include 5y yields, 5y5y fwd inflation breakeven, 10Y Italy-Germany spread; see a further 4-7bps of flattening
• EUR swap 30s50s are excessively flat, interpret this as further evidence of the impact of paying flows on the 30Y sector; in the absence of these flows expect a normalization of the 30s50s curve which would be consistent with 10s30s flattening view
• Taking an outright view on 10Y Italy outright or on spread remains unattractive from a risk-reward perspective given the sensitivity of the BTP market to a potential tapering announcement, domestic politics
• As a result of emerging scarcity in Spain, expect PSPP purchases to be more aggressive in short- dated bonds, before they roll out of the lower end of the eligible maturity bucket of one year, while in Italy there remains significant room for purchases, expect focus on very front-end
  • Recommend a 2s5s flattener in Italy vs Spain, or for investors willing to take more directional risk a less negative carry trade would be long 5Y Italy vs Spain
• Last week, recommended adding 5y ASW tighteners, noting that from a tactical perspective German general collateral rates and the implied repo rate from German bond futures have eased materially over the past couple of weeks, which is supportive of German spread tightening

Morgan Stanley (strategists including Anton Heese)

• No longer recommend real-yield curve steepeners or being long Schatz ASW; Bund direction indicators are neutral and don’t wish to stand in the way of such flattening trades anymore
• There has been a definite easing of collateral concerns at the front end of the German curve, with general collateral and specials repo rates moving higher, which has led the Schatz to cheapen up outright and on asset swap
• Rise in repo rates is partly due to FX reserve managers, official institutions becoming more proactive in lending out their Bunds (especially if they are trading special and the reward for lending them is substantial), with the move also generating its own momentum, as ASW hedges are unwound
• Appetite for yield pick-up is pushing the curve flatter, with a bull flattening dynamic starting to reassert itself; prefer to position for carry and roll through long 5y BTPs
  • Many investors are constrained in the ability and/or willingness to extend down the credit spectrum to gain yield pick-up, so extending duration is the only alternative for them

To contact the reporter on this story: Stephen Spratt in London at sspratt3@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Keith Jenkins