HALISTER1: EU RATES ROUNDUP: Long Duration, Euro 5y5y, Flatteners

EU RATES ROUNDUP: Long Duration, Euro 5y5y, Flatteners

(Bloomberg) -- Most analysts like holding or adding to longs in bunds or Euro rates ECB QE, lack of long-end supply, scarcity issues, EU referendum risks.
  • Both Morgan Stanley and Citi recommend long euro 5y5y; most neutral on peripheral spreads ahead of Brexit vote
  • Barclays (strategists including Cagdas Aksu)
    • Bunds will continue to be resilient despite stabilization in risk assets given U.K. referendum, bleak inflation outlook, slowing long-end issuance, friendly EGB cash-flows, maturity extensions in Bundesbank buying
    • Stay neutral on peripheral spreads, “Leave” and “Remain” outcomes for the U.K. referendum roughly evenly priced
    • U.K. front end prices possibility of further easing; MPC could ease in exit scenario; however, given the slowdown in economy, policy easing may well take place irrespective of the referendum outcome
  • BNP (strategists including Patrick Jacq)
    • Bull flattening of 10s30s Japan through 1Q points to euro-zone, U.S. bull flattening; supported by the ECB’s PSPP, attractive differential to JPY curve, weaker pension funds
    • Investors should position for this outperformance through JPY/EUR 10s30s boxes (paying JPY leg)
    • 0% level in 10Y bunds market be reached soon, little scope for further rally in front-end; main long outright positioning in core, curve flatteners
  • Citi (strategists including Harvinder Sian)
    • Negative convexity effect of ECB buying has flattened curves; relative to past, recent correlation with ECB DV01, buying show curves are still too steep
    • Powerful momentum to latest rally; ramping up of QE, scarcity issues, hunt-for-yield, lack of heavy issuance all point to ongoing support for European fixed income.
    • Recoupling of rates to ECB DV01 impact can be catalyst to target of -15bps on Bunds, 0.75%/0.70% in EUR 5y5y swaps
    • High quality assets to remain supported into EU referendum; If “leave” wins, 10s could get to 1%, If “remain” wins (base case), 10s could move back above 1.5%
  • Deutsche Bank (strategists including Francis Yared)
    • European bond markets valuations are stretched, but still far from extremes observed in 1Q 2015; positioning still appears to be short, snap back unlikely for now
    • Given extent of recent moves, valuation metrics, exit France 10s30s flattener, reduce outright long-end flattening exposure, refrain from entering bearish trades until U.S. survey data improves, positioning changes, clear EU referendum outcome
      • Maintain BTP 10s30s flattener, 5Y BTP/Bund spread tightener
    • Recommend paid position in EUR 5s10s20s fly, which had cheapened as markets priced further QE driven flattening in 1Q 2015, also cheapened bund tantrum in 2Q 2015
  • JPMorgan (strategists including Fabio Bassi)
    • Scarcity, Brexit fears, lack of supply support bull- flattening; maintain 10s30s flatteners but with 3bps trailing stop
    • 20s30s Bund curve particularly has room to flatten, has barely flattened this year; continue to hold cheap intra-EMU Brexit hedges, where spreads are close to YTD tights
    • Turn tactically neutral on swap spreads, take profit on Sep 16 Schatz/Bund swap spread curve steepener
    • Medium term swap spreads widening supported by QE-driven scarcity premium, lack of swapped issuance activity over summer, though valuations are wide given crowded longs ahead of EU referendum
  • Morgan Stanley (strategists including Anton Heese)
    • Given global bullish duration bias, look to add duration longs in euro rates; 5s10s offers most value, still sits steeper than at the beginning of 2015
    • Eurozone may continue to “Japanify”, compared to JPY swap term structure, 5y5y portion of the curve shows the biggest difference; if eurozone inflation, growth environment stays low this curve will lose its curvature
      • Recommend receiving EUR 5y5y at 0.98%
    • Bond market indicators turn bullish, high correlation between U.S. and U.K. rates, makes sense for long duration in the U.K.
      • Recommend long 5Y U.K. as it has tendency to richen on curve in rally: MORE
  • RBS (strategists including Andrew Roberts)
    • Rally is unrelenting, risk/reward for long 10Y bunds into June event risk is significant, positioning is flat, Japanese flow is increasing, ECB is running out of bonds
      • Hold double weight 10Y bunds, 10Y Sweden (out of UK & France), along with 10s30s EMU flatteners
    • U.K. economics on the back burner with focus on politics, earnings data, buy U.K. front end (5 yrs), getting closer to unlocking next U.K. rate cut
    • Expect a Spanish govt to emerge from elections in the form of a PP-led coalition; as political concerns fade, so does supply
      • Do not like peripheral longs outright ahead of EU referendum, though prefer owning Spain 30Y vs Italy
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Cagdas Aksu (Barclays PLC)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)

Topics
BFW EU Rates Analyst Wrap

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