HALISTER1: EU RATES ROUNDUP: Bias Toward Bear Steepeners Into ECB Meeting

EU RATES ROUNDUP: Bias Toward Bear Steepeners Into ECB Meeting

(Bloomberg) -- Most analysts hold a bear-steepening bias on core European rates into ECB meeting, given expected technical QE changes, views on program extension.
  • Citi (strategists including Harvinder Sian)
    • Expect ECB to extend QE by 6 months while tapering volume of purchases to EU60b per month from EU80b currently; also should drop depo yield floor as a hard reference for bond buying
      • May also increase issue limits above 33%, as this seems least problematic on legal and consensus grounds
    • There’s little consensus on most ECB matters except no hard QE stop; don’t expect hawks to leave empty handed, which should mean a bear steepener; 10y bund target still +0.5%, see a minimum of 10bps steepening from a drop in average maturity of purchases, target German 10s30s at 80bps
    • See selloff as being ultimately short-circuited by periphery widening and given HICP is unlikely to validate ECB projections
  • BofAML (strategists including Ralf Preusser)
    • Central scenario for ECB is a 6-month extension of QE at EU80b per month via minor tweaks in the capital key; should be bullish for both bunds and peripherals; expect ECB to raise non-CAC limit to 50% and use EU supra substitutes
    • Remain constructive on European rates, in particular vs the U.S.
    • Still like 30s50s BTP flatteners and the Mar17 FRA-OIS widener as tail-risk hedges in Italy
    • Believe repo issues will be addressed, which suggests being short schatz vs bunds (all vs OIS); remain unconvinced of the participation of EUR breakevens in the global reflation party
  • Barclays (strategists including Giuseppe Maraffino)
    • Expect ECB to extend QE beyond March 2017, change technical parameters and possibly add some measures on the securities lending program to ease repo pressures
      • Most likely changes are a substitution option for Germany, removal of depo yield floor, relaxation of the issue share for non-CAC bonds
      • These changes would likely be perceived as bullish for bonds, while the substitution option could be bearish for the ultra long-end
    • Core collateral squeeze will lead ECB to announce some measures to alleviate pressure in repo market, expect conditions of securities lending program to be eased
      • That wouldn’t address the issue of the sharp drop in core collateral availability; expect richening pressure to continue
    • Maintain 10s30s Ireland steepener, long March bund ASW vs Eonia, long 5y5y forward Italy versus Spain, and long 5s10s15s Italy and France
  • Deutsche Bank (strategists including Francis Yared)
    • Expect ECB to maintain the current pace of QE, extend by 6 months (with flexibility provided by the reference to a “sustained” improvement in inflation)
    • ECB will partially remove the depo-floor constraint, could also possibly increase issue limit or be more generous in its provision of repo operations; policy package will result in a “soft taper” for core rates
    • Maintain a strategic bearish bias; enter the ECB meeting with long-end core steepeners and Buxl spread tighteners
      • Rotate the France 10s30s steepener into a Germany 10s30s steepener as France spreads have tightened back
  • BNP (strategists including Patrick Jacq)
    • Recent rally has been accompanied by a sharp decline in real yields; lower supply by the end of the year remains a supportive factor for bond markets
      • The risk of a selloff by the end of the year has increased after the recent rally; this should be accompanied by steepening pressure on curves; hold paid position in 10y swap, keep German 10s30s bund steepener
    • Expect the ECB to extend its quantitative easing from March 2017 for six to nine months, with a cut in monthly purchases from EUR80b to EUR60b and a removal of the deposit-rate constraint; this outcome would result in a selloff led by real yields
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Harvinder Sian (Citigroup Inc)
Francis Yared (Deutsche Bank AG)
Giuseppe Maraffino (Barclays PLC)
Patrick Jacq (BNP Paribas SA)
Ralf Preusser (Merrill Lynch International)

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