HALISTER1: EU RATES ROUNDUP: Discussion on Capital Key; QE Trades in U.K.

EU RATES ROUNDUP: Discussion on Capital Key; QE Trades in U.K.

(Bloomberg) -- Analysts discuss recent mixed reports of ECB weighing loosening QE rules.
  • Following Carney’s speech last week, strategists maintain a long bias in the front end of U.K. curve, targeting further cuts; RBS and Citi recommend trades to benefit from future QE
  • Deutsche Bank (strategists including Francis Yared)
    • Irrespective of the outcome of Brexit process, U.K. economy will be adversely affected and BOE will likely frontload policy easing
    • Rotate long GBP 10Y breakeven into USD 5Y breakeven, maintain long Sept. MPC, BTP 10s30s flattener, and short March-17 sonia; stop out of short EUR 5Y
    • Enter GBP Libor Dec. 17-Dec. 18 steepener; trade has limited downside as long as any policy easing is frontloaded; negative rates are unlikely to be pursued
    • Given idiosyncratic risk related to Italian banks, likely response from the ECB, recommend being long 5Y PGBs vs. 10Y BTPs
    • Recent ECB sources reports suggest looking at deviating from the capital key; removal of yield floor, or increasing issue limit from 33% are far less politically contentious
  • RBS (strategists including Andrew Roberts)
    • Summer of easing to come in U.K., resumption of QE asset purchases perfectly feasible after rates reach 0%, dovish signals from BOE see market discount higher probability of QE
    • As a set-up, recommend long UKT 5s15s30s fly given lack of natural buyers in 20Y sector; smaller free-float in 7-15Y point suggests this offers best risk-reward
    • Spanish election outcome should allow a market-friendly center-right government, recommend long 10Y SPGBs vs BTPs, given less political risk, strong fundamentals; also like 10s30s SPGB flatteners
    • Previously forecast that ECB would cut its deposit rate by 10bps, upscale QE by EU20b-25b at Sept. meeting; some risk of further easing at July meeting, though not yet base case
  • Morgan Stanley (strategists including Jesper Rooth)
    • Recent rally in duration supported by BOE’s Carney, indicating more policy easing likely over summer
    • Market pricing for the ECB looks too aggressive, recommend being long 2y Gilts vs Schatz
    • Continue to recommend long-duration positions across G4 rates, surprisingly resilient risk-asset performance gives reason for caution
    • Potential changes to QE capital key should benefit periphery, particularly Italy; should alleviate some pressure on bunds
      • In addition, supportive cash flow dynamics in Italy, more positive bond market indicators, suggest owning periphery vs semi-core; recommend long 10Y BTP futures vs bunds
  • Barclays (strategists including Cagdas Aksu)
    • Higher economic, political risks for euro area, more potential QE easing/technicality changes from ECB, will result in notable volatility in duration, curve, EGB spreads over Q3
    • Continue to think 10y bunds will underperform vs USTs, maintain this recommendation
    • Remain neutral on EUR 10s30s swap curve, below 30bps, provides a good level to put on steepeners
    • ECB support through QE still significant for peripheral markets, technical changes being discussed give more fuel to this channel in short term; peripheral cash flows are notably positive in July, August
  • Citi (strategists including Harvinder Sian)
    • Carney’s speech signaling further easing over summer leaves door open to rate cuts and QE; with rate cuts priced, more value in QE trades, such as long 30yr gilt swap spreads, target further 20bps of richening
    • Remain neutral on EGB spreads; peripherals still “relatively resilient”, PSPP to be frontloaded ahead of August; ongoing uncertainties, political risks will keep spreads in check
    • Don’t expect removal of depo rate ECB QE floor as the Bundesbank would then have deeper losses on its buying, recommend paying 1y1y EUR OIS, targeting -0.42%: MORE
  • TD Securities (strategists including Renuka Fernandez)
    • Maintain long Sept. 2016 short sterling, look for BOE to cut by 50bps by year-end; initiate FRA/OIS wideners as a partial hedge to the position
    • Continue to like being long Gilts, market is pricing in some amount of QE, becomes difficult to go outright long; instead recommend buying Gilts on spread vs USTs at ~70bps
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Francis Yared (Deutsche Bank AG)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Harvinder Sian (Citigroup Inc)
Jesper Rooth (Morgan Stanley)

Topics
BFW EU Rates Analyst Wrap

To de-activate this alert, click here

UUID: 7947283