EU RATES ROUNDUP: ECB Account Dismissed; Steepeners in Vogue
(Bloomberg) -- Analysts mostly dismiss the recent ECB accounts, the release of which saw peripheral bonds rally, as containing little new information and any change in stance or operation seen as unlikely; curve bias remains firmly skewed toward steepeners.
- Barclays (strategists including Cagdas Aksu)
- Current levels of 65bps for 10y French spreads are not far off the equilibrium trading level in the event of a Le Pen defeat
- Higher taper risk premium, improving euro-area economic backdrop means that French spreads should trade around 50bps, even in a Le Pen loss scenario, compared with 2014-2016 ‘QE- era’ average of 35bps
- Le Pen win scenario would suggest 10y French spreads could at least potentially test the Eurozone debt crisis peak level of around 140bps in 10y sector
- See attractive risk/reward in maintaining EGB spread widening view via short 10y Spain vs Germany in periphery and short 10y Austria vs Germany in core space, as election risk premium is likely to remain elevated
- Maintain long Bund ASW vs EONIA trade, hold long-end periphery curve steepeners in 10s30s Ireland based on macro backdrop, credit risk premium arguments
- Deutsche Bank (strategists including Abhishek Singhania)
- ECB accounts show more explicit trade-off between purchases of bonds below the depo rate, deviation from capital key and is on the margin supportive of the large peripheral, semi-core
- Schatz/Bobl ASW has richened more than Bund/Buxl ASW as the German cash curve has steepened, despite richer implied repo rates on the longer bonds
- This suggests demand for front-end cash is being driven by increasing political concerns and the increasing Target2 balance of Germany, which results in excess liquidity then demand for short-term German debt will increase
- Maintain current trade recommendations including 1y1y/3y1y Eonia steepener, short Italy 10Y, long 10Y EUR inflation breakevens, short 10Y Bund ASW and long France vs Germany and Italy (50:50)
- Morgan Stanley (strategists including Anton Heese)
- ECB accounts don’t give markets anything new about how the ECB is implementing PSPP, as small deviations from the capital key have occurred since the program started
- See no evidence of the Governing Council, at present, wanting to change how the program is currently structured, although it could do so in the future if necessary
- In the U.K., more dovish data printed last week, still little evidence of inflationary pressures building beyond components which have been affected by GBP’s depreciation
- With some possibility of rate hikes priced in, recommend 2s5s gilt flatteners as a way to position for the MPC being on hold for longer than currently priced
- NatWest Markets (strategists including Giles Gale)
- Bund yields to stick in 0.15% to 0.50% range for now, as markets wait for more clarity on U.S. policies or European electoral cycle
- Support remains from ECB buying, carry enhancing negative repo, EUR break-up risks priced in, while inflation, risks of tweaks to QE put a cap on performance
- Continue to foresee steeper curve, maintain 5s30s EUR swap steepener and add 10s30s bund ASW; the ASW trade works for those concerned about ECB account comments on depo rate floor purchases, while extensions for EU20b-30b of long-end paying from the ESM as part of Greece’s debt relief remain
- SPGB 10y spreads can tighten further vs Germany, has also richened a lot on the curve, along with the 5y, which is increasingly seeing Japanese demand; given that Spain does not even tap the 7y sector, recommend going long the 5s7s10s fly
- Portugal should start attracting HY and EM investor demand, given yields are more than EUR-denominated sovereign bonds of countries such as Mexico and Indonesia; main risks are around supply and French politics; recommend going long PGB 2021 vs OAT 10/2021
- BofAML (strategists including Ralf Preusser)
- EUR 30y rates are now the most sensitive to U.S. rate dynamics, with the correlation between U.S. and EU rates having now shifted, bearish USD rate view therefore translates into an on-going bear-steepening bias in EUR
- Bearish factors for EUR rates to weigh mostly on long end, while bullish factors to be more supportive of the belly
- Higher U.S. rates, reduction in average maturity of ECB buying, upside inflation data leading to tapering fears, all negative long end; front end can find support from sub-depo rate buying, any risk-off moves
- Latest ECB minutes don’t change the outlook; peripheral spreads tightened significantly on the back of the release, though the ECB is just stating the obvious
- Remain wary of spread positions, as March sees net issuance turn significantly positive for Italy, at the same time as the Dutch election risks drawing attention to the support for populist parties
- Citigroup (strategists including Harvinder Sian)
- ECB minutes don’t signal a departure from the capital key, but periphery has romanced this idea on equally fragile news in the past
- Markets overlook that 33% issuer limits is a hard cap, which means under current parameters the ECB PSPP does not extend long into 2018 and it sows the seeds for the next debt crisis as this is the end of the ECB as lender-of-last-resort
- 10yr OAT/bund spread remains historically wide since 2013; momentum in the selloff has shown some pause; with the election 2 months away, and with ongoing headline risk likely, wouldn’t buy the dip just yet
- Eventual QE withdrawal and ongoing high DV01 of supply seen as other significant factors to spread widening; while total supply is set to be similar to last year, the DV01 of supply matters more given it is harder to digest and require more of a concession
- At the aggregate level, this year is set to see a record amount of supply in 15yr+ sectors, which should exert a steepening bias in 5s10s and 10s30s spread curves; periods of elevated DV01 of issuance have coincided with spread widening
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Cagdas Aksu (Barclays PLC)
Abhishek Singhania (Deutsche Bank AG)
Anton Heese (Morgan Stanley)
Giles Gale (Royal Bank of Scotland Group PLC)
Harvinder Sian (Citigroup Inc)
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