HALISTER1: EU RATES ROUNDUP: ECB Seen as Dovish; Focus on Fiscal Measures

EU RATES ROUNDUP: ECB Seen as Dovish; Focus on Fiscal Measures

(Bloomberg) -- Analysts expect ECB to be dovish yet non-committal at this week’s rate decision, with flattening bias favored.
  • Several analysts also focusing on potential move toward fiscal stimulus in Japan and U.K., and the subsequent consequences for rates
  • Barclays (strategists including Cagdas Aksu)
    • No imminent pressure for ECB to ease; tone likely to be dovish, indicating further policy easing in Sept. alongside revisions to EGB QE parameters
    • Sept. is a better time for communication on any revisions to parameters of EGB purchases, could get some hints next week
    • Continue to hold long 10Y Treasuries vs bunds, receive EUR 5y5y/5y10y/5y15y fwd fly recommendation
  • JPMorgan (strategists including Fabio Bassi)
    • Hold longs in 3Y, 10s30s bund flatteners and intra-EMU tighteners into ECB message expected to be dovish, but uncommitted on scarcity
    • Keep long 3Y Spain, 8Y Ireland vs France, 10Y Germany (25%) and Spain (75%) vs France (100%)
    • ECB to disappoint expectations for concrete action on scarcity; keep bearish hedges via reds/5Yx5Y weighted bear steepeners
    • In the U.K., expect substantial package of easing measures in August; stay long Nov-16 MPC OIS, look for 50bps of cuts; stay long 10Y gilts; receiving 5Y1Y offers attractive outright, risk-adjusted carry
  • RBS (strategists including Giles Gale)
    • Recent bund weakness a setback, not a turning point; driven by heavy supply, delayed reaction to U.S. payrolls, optimism that U.K. referendum uncertainty may be resolved sooner, and Abe’s call for fiscal stimulus
    • Fiscal chat, which has power to affect current bullish, flattening outlook for bonds, is starting to rise; evident in Japan, a little in the U.K. and rising from a low base in the U.S.
    • This isn’t the case in Europe, after recent discussion of fines for Spain and Portugal, which haven’t done enough on fiscal consolidation
      • Recommend moving from 30y UST into 50y Spain as a good way to hedge such rising risks; pick-up +50bps, targets 0bp, carry/roll 1bp/3-months, stop 70bps
  • Deutsche Bank (strategists including Francis Yared)
    • Strategic case for higher rates rests on fiscal policy potentially taking some burden off monetary policy over the medium term
    • Various positioning indicators (real money, hedge fund and retail) are showing increasing long duration bias; these tend to offer a contrarian bias and send bearish signal; such consistency is relatively rare
    • Maintain an overall bearish bias, remain short USD 5Y5Y rate, short March-17 eonia; rotate short 30Y Germany and Japan vs U.S. into outright short 30Y JGBs
    • Exit short EUR 5s10s30s, instead enter a long bund ASW position
    • In the U.K., rotate long Sep-16 MPC into long Aug-16 MPC, maintain GBP Libor Dec-17/Dec-18 steepener
  • Citigroup (strategists including Harvinder Sian)
    • ECB meeting on July 21 likely to be dovish given the Brexit impact, with be a bridge to Sept. meeting; main interest would be on any changes to the technical parameters of PSPP
    • Most likely consensus on addressing bund scarcity problems is likely to surround an increase in the issue limit for non-CAC bonds; recommend buying bund July 2044 vs Aug. 2046 at 3bps, target 7bps, stop 1bp: MORE
    • Any BOJ discussion of perpetual bonds could prove to be one of the most important bearish policy developments in bonds for many years because it would be construed as helicopter money
    • In U.K., BOE doing nothing in Aug. would be a huge shock; question remains on whether QE will become active policy tool; still like trades with QE themes, such as buying 30Y gilt swap spreads, long 15Y-20Y sector on curve
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Giles Gale (Royal Bank of Scotland Group PLC)
Harvinder Sian (Citigroup Inc)

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