EU RATES ROUNDUP: Long Duration Bias; Brexit Vote in Focus
Source: BFW (Bloomberg First Word)
People
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Giles Gale (Royal Bank of Scotland Group PLC)
Giuseppe Maraffino (Barclays PLC)
Topics
BFW EU Rates Analyst Wrap
To de-activate this alert, click here
UUID: 7947283
(Bloomberg) -- Analysts continue to lean toward long duration positions, with Citi, RBS, Morgan Stanley all maintaining a bullish bias.
Alert: HALISTER1- Heavy focus on EU referendum; most neutral on peripheral spreads until after vote
- Barclays (strategists including Guiseppe Maraffino)
- “Leave” outcome would drive spreads wider, although return to significant moves seen in 2011/2012 crisis seems unlikely
- Do not see factors that could affect the current resilience of the bund, prefer RV trades
- Citi (strategists including Harvinder Sian)
- Continue to expect lower European rates given expected continuation of “super low” inflation prints, technical impact of ECB squeezing bunds, idea that average ECB rate in the next cycle could well be negative
- See 10Y bunds moving to -15bps on ASW widening, 5y5y nominal rates falling in toward 0.75%
- Despite QE, periphery spreads can certainly widen if the backdrop is sufficiently negative; volatility likely to remain high next week, 10Y periphery spreads already at 12-mo. wides
- In a scenario of a leave vote, spreads would likely pierce the 12-mo. wides convincingly, further movement in spreads to be dictated by ensuing policy response
- Continue to expect lower European rates given expected continuation of “super low” inflation prints, technical impact of ECB squeezing bunds, idea that average ECB rate in the next cycle could well be negative
- Deutsche Bank (strategists including Francis Yared)
- Several metrics suggest market pricing close to a 50/50 outcome for U.K. referendum, rates market seems to be pricing a little higher odds of a leave
- In case of leave vote, ECB much more likely to adopt more aggressive liquidity, credit easing measures than cut depo rate
- Stop out of 5Y BTP/bund spread tightener; maintain BTP 10s30s flatteners, meant as risk-off hedge; maintain paying EUR 5s10s20s, should perform in a vote to leave scenario
- Hold short March-17 eonia as it is fully pricing a 10bps depo cut, should perform in a remain scenario
- In U.K., exit 5s10s flatteners vs USD, as performance on an in/out vote are now less clear
- JPMorgan (strategists including Fabio Bassi)
- Wide projected ranges based on leave, remain outcomes for EU referendum; 10Y Bunds -15bps to +5bps, German 10s30s 40bps to 60bps, 10Y Italy/Germany 125bps to 185bps
- Even in case of leave, expect intra-EMU spreads to tighten over time; general risk is fairly well priced
- Take profit on Brexit hedges via intra-EMU spread wideners as risk/reward is now less attractive
- For ECB, in case of remain, market should price 25-30% probability of further depo rate cut, in leave scenario highly likely (80% probability) of 10bps cut in the deposit rate
- Morgan Stanley (strategists including Anton Heese)
- Recommend staying received in EUR 5y5y rates into referendum this week; valuations more attractive than those seen in April last year
- With EU referendum too close to call, hold view that there is little point in trading EGB spreads on an outright basis at present
- Maintain long 30Y BTP vs short 10Y Spain; long-end flatteners continue to offer good risk/reward, trade could perform in both leave and remain scenario
- Recommend long 5Y Gilts at 0.69%; bond market indicators suggest being tactically long duration due to stronger momentum, signals from the stock market
- 5Y point offers a compromise between front-end, which would rally most in a stress environment, 10Y which offers best carry and roll
- RBS (strategists including Giles Gale)
- Global inflation pressures continue to ease, main supporter for continued yield rallies; reiterate referendum trades, flat periphery, 2x long bunds, long UK 2s, July SONIA
- U.K 2Y at 0.38% would head to 0% in a leave outcome, and not sell off much at all on a remain outcome
- Favorite long is 7y5y swaps, captures the peak of the forward curve, optimizes trade-off between the level and roll-down on the curve, target rally to 0.75%, stop at 1.70%
- In remain outcome, expect strong outperformance for periphery spreads, “knee-jerk” risk-off widening unavoidable in leave outcome, would use this opportunity to enter periphery longs
- SocGen (strategists including Vincent Chaigneau)
- Neutral G4 duration ahead of EU referendum, still reluctant to run shorts over summer; would buy dips in a remain scenario as any bond sell-off likely to be short- lived and limited
- Brexit would see wider spreads, PGB to underperform; Ireland well protected, impact could be favorable, contrarian view
- DSLs at more risk than OATs, focus shift to “Nexit”, disruption of another EU treaty referendum in Netherlands
- See value in 5Y OAT, want to position for convergence of 5s10s OAT, bund/OAT 10Y spread; recommend long OAT 04/2021 vs OAT 04/2026 and bund 02/2026 in ASW, target 15bp, stops 37bp
- 5s10s OAT steepeners should perform in risk-off, bund/OAT tightener is typical in risk on; offers protection in uncertain risk environment
Source: BFW (Bloomberg First Word)
People
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Giles Gale (Royal Bank of Scotland Group PLC)
Giuseppe Maraffino (Barclays PLC)
Topics
BFW EU Rates Analyst Wrap
To de-activate this alert, click here
UUID: 7947283