Halister News

(Bloomberg) -- Focus on ECB June 8 policy meeting, strong bias toward EUR front-end shorts, steepeners remains. Belly of the German curve is seen as vulnerable as Citigroup adds German 2s5s steepener looking for bearish repricing of rate expectations, while JPMorgan says short 2s5s10s is an attractive bearish proxy.

• Analysts offer caution on Italy, continue to prefer short expressions given election risks. Morgan Stanley bucks the trend, they go long 5y BTP vs OAT tactically to explore the relative valuation and carry

Barclays (strategists including Giuseppe Maraffino)

• ECB to drop downward bias on policy rates, which is widely expected; market is set for a dovish ECB, hold on to reds/greens steepeners, long Sept. 2017 Bund ASW versus EONIA trades
• Dutch bonds should find support vs other core issuers as July sees EU12.3b of redemptions, plus EU17-18b in QE buying, which results in investor displacement effect of around EU30b for the remainder of 2017
• Possibility of snap elections in Italy has risen; volatility in Italian, peripheral assets could increase in the coming weeks, will likely be driven by headlines and electoral polls

Citigroup (strategists including Harvinder Sian)

• Short, intermediate rates should push higher on the back of the upcoming June press conference, decisions to be taken in September
• Draghi to leave all options on the table, including assessment of costs/benefits of negative rates; sequencing risks remain after removal of reference to “well past” QE end when describing the timing of hikes
• Markets expectations where rates only rise towards a symmetric corridor (+15bps) in April 2019 and positive territory in late 2020, are too dovish
• Continue like owning 2y mid-curve Euribor puts; close paid position in 2y fwd 1y EUR vs NZD, instead add German 2s5s steepener at 28bps, targeting 50bps
  • Location of 2s5s is attractive vs other bearish alternative trades; continued QE buying will squeeze short-end, Italian elections raise risk that SNB could be active with large interventions

JPMorgan (strategists including Fabio Bassi)

• Expect ECB to shift to a neutral risk bias around growth, remove easing bias on both rates and QE, but keep reference to rates remaining at current levels “well past” QE purchases to avoid fueling sequencing debate
• Look for a mildly bearish reaction to ECB; hold short 30y and 7s15s steepeners in Germany; short 2s5s10s offers an attractive bearish proxy
  • Keep June 2018/Sept. 2018 and Dec. 2017/Dec. 2019 ECB OIS curve steepeners
• Early election in Italy appears likely; keep carry efficient proxies for Italy underperformance such as 3s10 Italy steepener vs. Germany, short 10Y Italy vs weighted Portugal & Spain, overweight low vs high-coupons

BofAML (strategists including Ralf Preusser)

• ECB will remove some of the asymmetric elements of its forward guidance next week, adjusting the balance of risks and removing the “or lower” statement on rates
• Rates market will focus on sequencing, securities lending; continue to believe the market is underpricing the probability of a technical hike
• Recent ECB speakers have defended current sequencing of rate hikes vs QE, the central banks’ assessment of negative side effects can potentially change, particularly regarding bank profitability
• Recommend paying Jan. 2018 Eonia, offering very attractive risk reward, with the removal of the “or lower” statement on rates should cap any rally

Deutsche Bank (strategists including Abhishek Singhania)

• Term structure of Eonia forwards show that risk-reward going into the ECB meeting is evenly balanced for now
• German 10s30s has steepened “excessively,” up around 12bps since first round of French election; driven by market view on ECB tapering, continued purchases in the front-end, slow rate path
  • Bundesbank will have to focus purchases across the curve in order to complete QE program; given this expected shift in distribution, recommend holding paid position in German 5s10s30s, 10s30s flatteners
• Exit 2s5s flattener in Italy vs France as likelihood of early elections has increased; changes to election law suggests the outcome is likely to become more bimodal raising the focus on a populist eurosceptic government

Morgan Stanley (strategists including Anton Heese)

• Continue to suggest steepeners on the Bunds curve; in particular, 3s30s DBRi steepeners; hold long 5y BTPeis on real yield, which combines view on front-end real yields being well supported, short-dated peripheral paper is an attractive carry and roll trade
• Increased risks of early Italian elections has seen a rise in political risk, though this has been idiosyncratic to Italy risk so far, causing BTPs to underperform
• Fair value models suggest BTP is cheap vs OAT; given already short positioning, futher downside to BTP is limited; recommend going long 5y BTP vs OAT tactically to explore the relative valuation and carry
• Risk to the trade is if BTP underperforms if FVM gains momentum in polls; also like to keep the long low-vs-high coupon BTP portfolio as a hedge

To contact the reporter on this story: Stephen Spratt in London at sspratt3@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Keith Jenkins