HALISTER1: EU RATES ROUNDUP: Concession Unwinds; Bull Market May Pause

EU RATES ROUNDUP: Concession Unwinds; Bull Market May Pause

(Bloomberg) -- Analysts hold bias towards RV trades which benefit from supply concessions, recent cross-market widening being unwound; some expect recent bull market in EGBs to pause, as risk assets look to recover.
  • Barclays (strategists including Cagdas Aksu)
    • Despite Draghi’s dovish speech, peripheral spreads remain under pressure given heavy supply, mixed domestic political news, nervous risk assets, poor liquidity
    • Maintain neutral view on bunds; continue to like 8y Portugal vs 50% Italy and Spain, long 2025 10Y Belgium vs Germany
    • More ECB easing likely in March, baseline for 10bps depo rate cut with another cut later in year, as early as June; ECB may also announce technical changes to QE design, do not envisage any material size or time extension
  • RBS (strategists including Michael Michaelides)
    • Expect China to weaken yuan further likely within 3- months, compounding deflationist theme
    • Investors too complacent on Spanish political risks; most likely scenario remains new elections or Podemos govt; Spanish fundamentals good, headline risk could trigger correction in SPGB spreads; prefer to hold peripheral longs in BTPs
    • Turn cautious on Ireland given political risks, maintain belief in long-term convergence to semi-core; polls show current govt fall short of seats needed to retain power, increases risk of grand coalition; take off 10Y Ireland/Belgium tighteners
  • Deutsche Bank (strategists including Francis Yared)
    • Tighter financial conditions, signs of weaker U.S. growth increase the likelihood of more aggressive ECB easing; depo rate cuts likely favoured, odds rising for increased pace of QE
    • Increasing probability of more aggressive QE prompts extending long 5Y BTP to 10Y sector; benefits from recent steepening of the curve following the large 30Y syndication
    • Flattening of core curves with limited richening of the 20Y part of the curve suggests this hasn’t been driven by aggressive receiving from the ALM community
  • SocGen (strategists including Vincent Chaigneau)
    • Take profit on longs in G-4 duration; bond rally unlikely to extend before G-20 meeting on Feb. 26-27 given oil-price rebound, dovish central banks (positive for risk sentiment)
    • Long-end supply has weighed on the back-end of OAT curve; substantial concession should retrace, further ECB easing should encourage continued spread compression: MORE
  • BNP (strategists including Ioannis Sokos)
    • EUR curve may re-steepen as front end well-anchored by ECB easing expectations; recommend adding downside hedges in 10Y EUR rates via 10M10Y OTM payers
    • Austria/Bund widening in 20Y sector due to bull flattening of 10s15s Germany; support for spread compression seen as bund rally now stretched and further ECB easing likely in March: MORE
  • Citi (strategists including Harvinder Sian)
    • Expect no 30Y BTP supply for the rest of 1Q (unlike Spain and Germany), EU8b of coupon payments due by end- Feb; recommend BTP 10s30s flattener vs bunds: MORE
    • OAT 5s10s flatteners may work in scenario of risk- reduction by international accounts (5Y underperforms), continued market rally (10Y leads): MORE
  • Morgan Stanley (strategists including Matthew Hornbach)
    • Bond market indicators continue to suggest investors remain long 10Y UST, DBR and UKT; unwind 10s30s BTP steepener vs Germany after recent moves
    • France 10s30s has underperformed Germany given supply front-loading; heaviest supply month now out of the way, AFT to refrain from issuing long-end paper in near-term
    • Recommend 10s30s OAT flatteners vs Germany, entry 29bps, target 20bps, stop 34bps
    • Buy 30Y OAT vs Germany, entry 61bps, target 50bps, stop 65bps
  • Nomura (strategists including George Goncalves)
    • Despite Draghi’s recent emphasis of the ECBs dovishness, positive impact on FX, BEIs has been missing completely; 10s30s EUR steepener trade has stopped out
    • Maintain received 3Y1Y Eonia as ECB likely to focus more on shifting market perception of lower bound for depo rate
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Cagdas Aksu (Barclays PLC)
Francis Yared (Deutsche Bank AG)
George Goncalves (Nomura Holdings Inc)
Harvinder Sian (Citigroup Inc)
Ioannis Sokos (BNP Paribas SA)

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