Halister News

(Bloomberg) -- Analysts continue to focus discussion around potential changes to ECB QE rules; on the curve, bias remains towards flatteners.

• Focus on BOE this week, many recommend long positions in front-end MPC dates; Citi, Deutsche Bank add QE trades

• Morgan Stanley (strategists including Matthew Hornbach)
  • Turn neutral on G4 duration; yields have fallen dramatically since EU referendum; momentum to lower yields remains supportive
    • Equity market performance, poor volatility-adjusted carry weigh more heavily on prospect for positive excess returns in near future
  • Gilt market is not yet fully priced for rate cuts, though has started pricing QE; bund market shows signs of additional QE being priced via much flatter yield curves since Brexit, suspect markets have taken it too far, too fast
  • ECB QE can go on for another 6-7-months given current yields, rules; increased issue share limits, at least for non-CAC bonds, along with a soft move away from the capital key, would be an achievable compromise for ECB
    • This should favor BTPs at the expense of bunds, continue to recommend tactical longs in IK vs RX

• JPMorgan (strategists including Fabio Bassi)
  • Maintain longs in 3Y, 10s30s flatteners on Germany curve, predicated on notion that ECB will only respond to scarcity concerns in Sept.; don’t expect significant change in capital key allocation
  • In EGB spreads, hold modest tightening exposure; peripheral bonds are too wide vs core, open longs in 3Y Spain outright, shorts in 10Y France vs. Spain and Germany; do not expect potential issuance of a 10Y benchmark Bono to hurt
  • MPC to cut Bank Rate by 25bps this week, cut to be part of package of measures (including QE) over coming months; stay long Nov. 16 MPC OIS, long 10Y gilts, enter tactical long 10Y swap spread wideners
  • Swap spread widened recently as crowded QE trades were unwound after speculation ECB will deal with bond scarcity
    • Spreads now too narrow, biased for further widening given further scarcity, lack of swapped issuance activity over summer; recommend bund swap spread widener

• RBS (strategists including Andrew Roberts)
  • With 30y bunds at 0.37%, 30y Japan at 0.10%, investors are fleeing into anything with yield
  • Downward pressure on yields to continue given core inflation likely to fall, risk of further cut in policy rates, extension of QE, retention of flight-to-quality premium by bunds; recommend buying 10Y bunds at -17bps, target -40bps, stop at -0.05%
  • Italy/Bund spread to compress; politics, banks a concern, though flows matter more with LTRO money, negative net issuance for remainder of the year, low yields driving search for yield
  • Spain is preferred over Italy; fundamentals are better, political situation improving; recommend long 30Y Spain vs France and long 30Y Spain vs Italy
  • ECB is increasingly forced down the curve, investors will be pushed this way too in search for yield; 30y bunds can go to zero (currently 37bps), favorite peripheral flattener is in Spain, 10s30s can hit 70bps (currently 104bps)

• Barclays (strategists including Rajiv Setia)
  • Recommended 10y UST vs bunds over past quarter, maintain this view; Treasuries attractive in global context, latest rally in global haven yields is only likely to increase their appeal
    • ECB looking to adjust parameters of QE, potentially reducing bund demand, should limit a rally
  • ECB unlikely to rely on aggressive depo rate cuts; focus is to be on more QE (extension beyond March 2017), bolder credit-easing measures
  • Outright duration outlook for bunds very volatile in coming weeks; EUR curve to remain directional, 10s30s bear-steepening during sell-offs, bull-flattening during rallies

• Deutsche Bank (strategists including Francis Yared)
  • Market already pricing 9m-12m extension of ECB QE, changes to PSPP necessary; market under-prices risk of removing yield floor, and/or a shift in composition of purchases
  • Deviation away from ECB capital keys, even if not a move toward weights based on outstanding amount of debt, should favor Belgium within semi-core countries at the expense of Netherlands; recommend going long 30Y Belgium vs Netherlands
  • Recent rhetoric highlights risk that U.K. MPC will ease sooner rather than later; maintain long Sep. 16 MPC sonia and Dec. 17/Dec. 18 steepeners
    • Low yield environment pressures pension funds, reduces likelihood of QE as initial policy response; measures may be taken to reduce impact of QE on long-end yields, offers more nuanced version of BOE QE, recommend long 15Y swap spread vs 30Y

• Citi (strategists including Harvinder Sian)
  • Move to new lows in global bond yields is rightly pricing more central bank impotence, pricing can go further
  • ECB QE flexibility in focus, ECB could hit 33% limit on bunds as soon as this month; see 5% probability of depo floor or capital key being removed
    • See high probability, 45%, of raising purchase limit for non-CAC bonds, though low probability, 10%, of raising limit on all bonds; see 35% chance of reallocating portion of German PSPP purchases to other NCBs
  • Gilt market is already well priced for rate cuts and recession, but not QE, recommend adding QE rates via receiving GBP 5F10Y vs 5F5Y and 15F15Y: MORE

First Word scrolling panel: FIRST First Word newswire: NH BFW --With assistance from Tanvir Sandhu. 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 V. Ramakrishnan