HALISTER1: EU RATES ROUNDUP: Longs, Flatteners Favored; Risks Loom for BTPs

EU RATES ROUNDUP: Longs, Flatteners Favored; Risks Loom for BTPs

(Bloomberg) -- Many strategists maintain long, flattening bias, given expectations of further policy easing, ongoing search for yield, ECB purchases forced out the curve.
  • Despite negative net supply in Italy for August, Barclays and Citigroup highlight concerns for BTPs stemming from Italian bank NPLs, constitutional reform referendum in October
  • Barclays (strategists including Cagdas Aksu)
    • Longer-maturity purchases from ECB in Germany to continue accelerating, barring any technical changes; 10s30s curve well correlated to average maturity of ECB’s purchases, may see further flattening pressure
    • Peripheral spreads have stabilized, see poor risk-reward for being long peripheral spreads outright from current tight levels
      • Outstanding Italian banking sector issues and prevailing political headwinds such as the constitutional reform referendum in Oct. add to concerns, which require some risk premium
    • Maintains trades that that take into consideration various technical changes to QE that could be implemented by the ECB as early as in Sept.; stays long 7y French ASWs, Portugal 4s30s steepener, short 6y Belgium vs Austria
  • BNP (strategists including Eric Oynoyan)
    • Current bund trading range (-15bps to 0bps) likely to continue in coming weeks, before stronger repricing close to Sept. ECB meeting
    • Peripheral yields are near all-time lows, while spreads are still 30bps-40bps wider than March 2015 lows; spreads look too wide vs semi-core, largely due to negative Bund yields
    • Supply turns favorable for peripherals in the week ahead; Spain supply this week, low BTP supply for August
      • Enter SPGB/BTP 10Y widening trade at -11bps, targeting 0bps, stop at -18bps
  • Citigroup (strategists including Harvinder Sian)
    • Global factors remain bullish for bonds; ongoing easing across various regions, low credibility of Fed tightening, low yields causing duration extension and cross-market buying, low inflation is being cemented
    • BOE easing could take a number of forms but rate cuts, QE seen in future with recessionary data the trigger point; continues to favor long ASW and 15y on the curve, also like selling GBP payers (3m5Y) as a good short-term trade
    • Peripheral spreads to remain supported by waning supply pressures, may not be true for BTPs; NPL situation, Oct. referendum risks are present, sees underperformance vs Spain as justified, wouldn’t fade the move given upcoming event risk
    • Seasonals don’t look supportive for EUR breakevens in Aug. while negative carry in Sept. is also likely to weigh in the near term, sell OATei27 breakeven vs Bundei26: MORE
  • Deutsche Bank (strategists including Francis Yared)
    • Eurozone 5Y5Y fwd real yield, excess flatness of the EUR 5s10s slope, levels of implied volatility, tightening of high beta peripherals suggest additional QE pricing and a hunt for yield gathering momentum
    • Exit Bund ASW widener as it now stands closer to the average level seen since the start of QE; maintain other trades which should benefit from a hunt for yield and/or additional QE pricing
    • Markets have been increasing BOE expectations; rotate long Aug-16 MPC into a Sept.-16 Libor, should benefit from pricing of additional easing, together with potential tightening back of FRA-OIS basis should BOE announce additional liquidity measures
  • RBS (strategists including Andrew Roberts)
    • Growth-data surprises are at multi-year highs, this is down to consensus being too hawkish, stays long bonds as the world still looks “anemic”
    • Monetary and fiscal policy will be used in U.K., fixed income looks cheap into Aug. 4 BOE meeting; favorite U.K. rates trade remains the QE sweet-spot of 15-20Y, bar-belled out of 5y and 30y
    • Fiscal reflation is in focus, acknowledges threat this holds to lower/flatter yield curve view; see this as more likely in Japan, U.S., U.K., than in Europe; potential fiscal divergence could be played via 5s30s USD steepener boxed vs 5s30s EUR
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)

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