EU RATES ROUNDUP: Bearish Bias on Italy, New ASW Longs Added
(Bloomberg) -- Analysts remain bearish and continue to hold shorts/steepeners in EUR front-end as ECB outlook the dominant theme.
- Some focus on Italy given political outlook; Citigroup sees BTP/bund at 300bps in Q1 2018, while JPMorgan targets 250bps, both recommend various short BTP expressions; in the short term, NatWest Markets likes adding long BTP vs bund after recent supply-led widening
- Recent collapse in ASW has prompted JPMorgan and Barclays to recommend new longs, while SocGen doesn’t recommend fading just yet, given expected swapped corporate issuance in coming weeks
- Barclays (strategists including Cagdas Aksu)
- With the French election over, the market’s focus will likely shift from political risks to the economic backdrop and the ECB’s reaction function over the coming months
- Close outright short 10y France trade, which had been held as a bearish duration expression, though hold short duration bias in EUR rates through reds/greens and Sept. 2017/Jan. 2018 Eonia steepeners
- Recommends going long Sept. 2017 bund ASW vs Eonia as the spread has dropped sharply after French election, helped by swapped issuance; MORE
- Citigroup (strategists including Harvinder Sian)
- While rates investors may feel boredom as tight price ranges tend to limit profitable wagers, there are numerous trends and themes to trade
- Inflation expectations are unanchored, and inflation surprises should now be to the downside; continues to recommend selling 5y5y breakevens across markets with highest conviction in EUR and GBP
- ECB hike premia is set to rise with the exit from negative rates more speedy than the exit from zero; remain payers in Sept. ECB OIS, own mid-curve Euribor puts and pay EUR 2y fwd 1Y vs NZD
- Italian bonds are vulnerable into elections; likes expressing shorts with positive carry and recommends 2s5s BTP steepener vs bund; also likes long SPGB vs BTP; forecasts BTP/bund at 300bps Q1 2018; MORE
- NatWest Markets (strategists including Andrew Roberts)
- ECB tapering now the main market focus since France; consensus sits squarely on view that ECB taper from Jan. 2018 by EU10b per month, finishing in June/July; as a result clients views are generally bund bearish/EUR fixed income bearish
- Already holds long BTPs; but the short-term effects of this past week’s heavy risk issuance has seen BTPs widen 10bps vs 10y bunds, which should now be reversed; recommends long 10y BTPs vs bunds as trade of the week
- Japanese investors minimized French election risks by shedding paper; expects Japanese demand to come back after June, which means OAT spreads can tighten 10bps; maintains OAT/bund spread tighteners, targeting a further 7bps in 10y to 38bps, also hold 30y tightener
- Hawkish BOE didn’t materialize this time around; takes small profit on trade to pay 1y1y Sonia, continues to hold 5s30s gilt steepeners as BOE maintains a loose policy stance against a backdrop of rising inflation; also sees 5y5y GBP around 60bps as rich vs IMF nominal GDP projections
- JPMorgan (strategists including Fabio Bassi)
- ECB remains on track to deliver a slightly more hawkish tone in June, holds 30Y Bund shorts, but add stop at 1.10%; maintains 7s15s steepener as this offers better carry characteristics than outright 10y shorts
- Expects range-bound spreads in the next few weeks but remains confident in medium-term widening
- Adds defensive trades in Italy; holds a negative view on Italy via 3s10s credit curve steepeners, underweight vs Portugal and Spain and hold long low-coupon vs high coupon; looks for range trading in the short term to precede medium-term widening with 10Y Italy-Germany target of 250bps ahead of the general elections
- Keep June 2018/Sept. 2018 and Dec. 2017/Dec. 2019 ECB OIS curve steepeners; in the U.K., add front-end UK money-market longs for carry
- At current levels, biased for cheaper 10Y in the 5s10s30s EUR swap fly, wary of entering the trade as see some risk of idiosyncratic cheapening of 30Y on the back of ESM paying flows
- Swap spreads are now trading too narrow vs fundamentals; recommends adding Sept. 2017 Schatz OIS swap spread widener as QE flows continue to be skewed to front end, repo pressures remain, Sept. 2017 contract trades
- Deutsche Bank (strategists including Francis Yared)
- Core inflation expected to rise gradually in coming quarters; clearer signs of downstream PPI inflation picking up are expected to raise confidence in this view in coming months; valuations well below HICP forecast and models; stays long EUR 10y breakevens
- Divergence in 2s5s slope in France vs Italy since the elections is inconsistent with the recent drivers including 2Y Eonia yields, 5y yield volatility and 5Y spreads to Germany; recommend 2s5s steepener in France vs BTP flattener
- In the U.K., MPC pushed back on excessively dovish front-end pricing; exit paid position Feb. 2018 MPC and paid 1Y1Y Sonia vs the U.S., looks to re-add if GBP front-end pricing returns toward the rich levels of late April/early May
- Holds gilt 5s10s steepener as forwards price in bear flattening of 5s10s slope inconsistent with historical trend that tends to see the curve bear steepen as rates rise
- 20y sector looks cheap on gilt curve, with the 2037s now unlikely to be tapped until July at the earliest; the current dislocation has room to normalize; recommends long the belly of the gilt 15s20s30s fly
- SocGen (strategists including Vincent Chaigneau)
- Increases shorts in G4 duration as markets approach the top end of 2017 ranges; with key tail risks diminishing and the global economy charging ahead, global bond yields are adjusting higher; 10y Bund yield is facing yet another test at the upper end of the range (0.50%)
- Central scenario has 10y Treasury breaking 3%, Bund breaking 1% by early 2018, with further modest gains in yield next year
- Swap spreads have narrowed sharply since end-April; doesn’t recommend fading just yet, expects current market dynamics of corporate issuance swapping to persist over the next couple of weeks
- BOE’s Inflation Report provided little new information, should ensure the front end remains anchored; maintains curve steepener in GBP 5s10s outright and vs EUR
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
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