HALISTER1: EU RATES ROUNDUP: Curve Steepening May Ebb as Cash Flows Support

EU RATES ROUNDUP: Curve Steepening May Ebb as Cash Flows Support

(Bloomberg) -- Recent supply-driven weakness in long-end creates potential for outperformance amid large positive cash flows in coming weeks, analysts write in client notes.
  • Barclays (strategists including Giuseppe Maraffino)
    • Risk-on mood has driven tightening in periphery EGB vs core spreads; political uncertainty not yet fully priced
    • Maintain short 50% 7Y Belgium, Ireland vs Netherlands and short 6Y Belgium vs. Austria; hold on to short duration bias via short bund ASWs vs EONIA, tactically pay 1Y1Y Eonia forward
    • Recommend buying RXU6 payers vs matched-maturity swaption payers as a conditional expression of short Bund ASW view
    • In gilts, recent rally has been driven by a richening of the 5Y-10Y sector, GBP 5s10s30s fly at unsustainably rich lvls; expect tactical paying of GBP 5s10s30s ahead of May MPC meeting
  • RBS (strategists including Giles Gale)
    • May see more ultra-long end supply following France’s 50Y issue; see tendency to reduce exposure to sector as convexity looks better value in 30Y maturity
      • Recommend 30s50s steepeners at -10.5bps, target +2bps, stop at -15bps
    • Large upcoming redemptions, coupons in France unlikely to have much impact; start of Japanese FY can bring supportive flows
      • OATs now yield more than USTs once adjusted for cross-currency basis; yield search driving investors into longer maturities; recommend 5s15s OAT flattener
    • Italy’s progress on Senate reform and initiative for banks should be positive for investors in Italy, reinforces bullish outlook on BTPs given ECB easing
  • JPMorgan (strategists including Fabio Bassi)
    • No fireworks expected from the ECB; hold longs in 3Y and 10s30s flatteners, recommend cheap hedges such as bund steepeners in front-end
    • Hold intra-EMU tactical tighteners; recommend underweight 10Y-15Y Italy as valuations are expensive, expect pressure from new 15Y syndication in coming weeks; open new shorts in 2Y Ireland vs France
    • DBRS expected to keep a stable outlook on Portugal
    • Recommend receiving June ‘16 ECB as cheap option on further ECB easing, stay neutral further out
  • Deutsche Bank (Francis Yared)
    • Valuations of core rates are rich, driven by low term premia in the U.S., low breakevens in Europe; supply/demand perspective remains favorable
    • Maintain key macro trades; long EUR 10Y breakevens, EUR 2s5s flatteners, stay neutral periphery
    • In the event of a vote in favor of Brexit, MPC may act sooner than currently priced in U.K. front-end; alternatively, money market curve should steepen aggressively should U.K. vote to stay in EU
      • Recommend August-December MPC dated steepeners
    • Front loading of gilt issuance ahead of referendum should result in some long-end concession; recommend short 50Y spreads into 2065 syndication
  • BNP (strategists including Patrick Jacq)
    • Maintain outright long exposure to EGB market as improvement in supply conditions should lead to a continuation of rally in the coming week
    • Large negative net supply for remainder of the month should push down bund implied premium, may lead to further 15bps rally
    • Long-end has now absorbed large amount of supply while front-end remains pinned; more positive bias will support curve flattening: MORE
  • Societe Generale (strategists including Marc-Henri Thoumin)
    • Recent OAT syndications have resulted in substantial long-end concession; recommend entering 10s30s OAT flatteners in ASW: MORE
  • Commerzbank (strategists including Christoph Rieger)
    • Still see scope to pare duration at current levels, looking to add at 10Y yields closer to 0.25%; core paper caught between supportive cash flows, headwinds from recovering risk sentiment in coming week
    • Maintain spread tightener expressed via Italy for coming weeks and are more cautious on Portugal: MORE
  • HSBC (strategists including Wilson Chin)
    • German flattener is at relatively attractive levels following recent EGB supply at the long-end, especially from France
    • Recommend buying 20Y DBR4 Jan. 2037, sell 5Y OBL0 April 2021: MORE
  • Citigroup (strategists including Harvinder Sian)
    • Expect new lows in bund yields aided by scarcity issues; peripheral EGBs face near-term headwinds from Brexit risk and Greek discussions but should ultimately see lower yields
    • Further ECB policy iterations are likely in Sept., which in turn locks down lower-for-longer and scarcity issues for bunds
    • Recommend GBP 2s5s steepener; target 50bps, stop 7bps, carry -0.9bp/3-mo
      • Simple expression of the idea that BOE hiking cycle is more likely than a cutting cycle, regardless of Brexit: MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Giuseppe Maraffino (Barclays PLC)
Christoph Rieger (Commerzbank AG)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Giles Gale (Royal Bank of Scotland Group PLC)

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