Halister News

(Bloomberg) -- Carry is back in vogue, with prospects for ECB QE throughout the summer months and limited long-end supply. Citigroup (strategists including Harvinder Sian)

• Demise of U.S. inflation spells a new bull flattening phase for European rates; recommend entering German 10s30s flatteners, targeting 65bps as curve looks steep based on inflation expectations, 3y1y OIS and German PSPP weighted average maturity: MORE
• In the U.K., MPC was a hawkish surprise with 5-3 vote, but 10s still hovering ~1%; gilts will continue to be volatile without direction owing to political uncertainty
  • New trend post-election is higher beta of 30y; fiscal risks are a concern, but see a near-term bias is for a re-flattening of 10s30s as 1% level in 10s is acting as a magnet, while the 30yr sector has more room to rally, especially once this week’s 30y supply has passed
• Positive political headlines in both France and Italy have seen many spreads tighten further; ongoing spread consolidation over the summer remains the base case

Barclays (strategists including Cagdas Aksu)

• Turned outright short 10y bund last week as even after the post Fed, BOE selloff, see that both the expectation and term-premium component of bunds on the expensive side
  • Rationale includes low ECB rate hike pricing, dovish ECB pushing more tightening into the future and therefore higher term premium, possible continued capital key deviation from Germany and ultimate tape
• As another bearish expression, also continue to hold reds/greens EONIA steepeners: MORE

Deutsche Bank (strategists including Francis Yared)

• Recent decline in open interest on BTP futures is indicative of short positions being scaled back extensively, suggests that investors had probably positioned for early elections
  • With short positioning now having been cleared, expect high carry and roll points to be in demand; maintain 7s30s steepener in Italy vs Spain
• Don’t make any changes to other outstanding trade recommendations; hold received position in 1y1y Eonia, 10s30s flattener in Germany, 5s10s flattener in France, and received EUR vs USD 5y5y nominal rates
• In the U.K., hold gilts 5s10s steepener as the curve remains "excessively flat" to models, while comparison of valuations above highlights 5s10s as flat relative to the longer end
  • Also hold short 30Y U.K. vs Germany as the long-end of the U.K. curve remains very rich despite the risk of increased fiscal policy, while German long-end looks cheap across a range of valuation metrics

JPMorgan (strategists including Gianluca Salford)

• Domestic factors continue to support the view of higher bund yields into year end, but the U.S. rates outlook provides increasingly less support; hold German 7s15s steepeners
• Recommend fading the cheapening of short-end Germany outright, or vs OIS; as Schatz yields are at YTD highs, long positions justified by the expectation of ongoing pressure on short-dated maturities from Bundesbank and ECB QE operations, expect repo rate pressures to resume in coming weeks
• In Spain, see a high chance of 10Y syndication this week; around the launch of the last five new 10Y Bonos, the 10Y off-the-run Bono vs Germany outperformed more than 5bps in the days following the syndicate; expect similar dynamics this time around
  • This should support existing recommendations in 3s10s Spain-Germany credit curve flattener; also recommend adding long 10Y Spain to the 10Y Portugal vs Germany tightener

NatWest Markets (strategists including Andrew Roberts)

• Continue to position for carry over summer, favorite expressions are long 30y BTPs, or 30y France (also hold 10s30s flatteners), with ECB QE all summer and no long-end supply; also favor long 7y Portugal
• Favor spread tighteners on this view, prefer to hold longs in Italy and Portugal; in Spain prefer to play the curve, see 10y sector as expensive and likely see a new syndication before the end of July, recommend short the sector vs 5y and 50y
  • Hold long PGB 02/2024 vs SPGB 04/2024 to 90bps, move stop to 120bps, 3m carry and roll is positive by 8bp
• In the U.K., uncertainty is greater than ever given lack of clarity over Brexit, political risks cloud the outlook for fixed-income markets
  • Hawkish BOE rhetoric has been a good signal to fade policy tightening expectations, but hike premia are already very low; continue to favor curve steepeners, 2y2Y/5y5y or for those with a more hawkish BOE outlook, 1y1y/2y1y

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 Neil Chatterjee