HALISTER1: Bunds Underpinned, Market Short for ECB; Peripherals Outperform

Bunds Underpinned, Market Short for ECB; Peripherals Outperform

(Bloomberg) -- Bund futures bounce from the open as some traders suggest short covering demand; small selling seen into the rally, though flows light. Peripherals gains as investors turn more bullish with political risks seen fading, demand seen in both 10y Spain and Italy, as well as block buyer in BTP futures vs bunds.
  • Strong bias to be short rates into the ECB meeting, with Barclays, Deutsche Bank and JPMorgan all recommending short 10y Bund into ECB, while Citigroup and BNP also expect Bund yields to head higher in the short term: MORE
  • Cash-flow environment turns very positive over the next fortnight with supply light; France to repay EU32.8b in redemptions this week, plus EU14.9b in coupons; next week sees redemptions worth EU16.8b from Spain (Oct. 31) and EU15.7b from Italy (Nov. 1)
  • Investors turn more bullish on peripherals; decent buying seen across 7-10y Italy, plus 2.5k block buy in BTP futures vs 2.1k bund; demand seen in 10y Spain as Catalonia elections also seen as positive: traders
    • Italian yields lower by 3-4bps across 5-30y sector, Spain lower by 2-3bps
  • Bunds underpinned from the open, though fade from highs as stocks gain; option flows have been skewed toward downside in bunds, though some upside trading this morning with buyer of Bund Dec. 162/163 call spread vs selling 160 puts for 10k, paying 6.5 ticks, say traders
  • Treasuries dip in European hours despite gains in bunds, focus on 2.4% in 10y which many strategists have highlighted as key support. In options, large buying Nov. TY 124.25 puts is seen with 23k bought at 6 ticks, strikes targets ~9bps increase in 10y yields
  • German 10y yield -2bps at 0.44%; Dec. bund futures +19 ticks at 161.63
  • Spain 10y yield -3bps at 1.64%, Italy -4bp at 2.01%
  • NOTE: Excel heat map of euro-area govt bond curves and spreads here
  • For overnight news and what to watch, see EU FX/Rates Daybook
To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net Scott Hamilton

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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