Halister News

(Bloomberg) -- Analysts see scope for some modest further sell-off in bunds, widely acknowledging position reduction has been the driver. For a meaningful sell-off, improvement in the inflation picture is needed.

• Barclays close short bund call but hold bearish steepeners in the front-end, while Deutsche Bank close Eonia 1y1y/4y1y steepener. JPMorgan hold 10s30s steepeners as a bearish bias, while Morgan Stanley now recommend short bund vs UST
• In the U.K., there is some moderation of the strong short bias which has existed in the front-end; JPMorgan recommend new longs in November 2017 MPC, while Morgan Stanley recommend long 6m1y SONIA

Citigroup (strategists including Harvinder Sian)

• Bunds are seen as having fair value near 0.44% and become statistically cheap above 0.62%, making it a good level to start to scale into longs: MORE
• QE program to buy more French, Italian bonds in 2018; means there may not be a material change in the volume of BTP purchases
• In the U.K., a rate hike seems distant as data is inconsistent with tightening, there is scant evidence that policy is too loose
  • Inclined to fade the sell-off, but need weaker data to turn the momentum, adding importance to this week’s labor market data; there is also seasonal support as gilts tend to rally in July and August

JPMorgan (strategists including Fabio Bassi)

• Recent sell-off in bunds is justified by a better understanding of central bank rhetoric, better activity data and oil prices bottoming out; next leg higher in yields will require more clear sign of inflationary pressures (maintain year-end 10y Bund target of 80bps)
• Continue to hold 10s30s steepeners as a bearish duration proxy on valuations, positive carry and slide and QE dynamics, also hold longs in the two-year sector as repo, flight-to-quality risk support lower yields
• Close shorts in Italy vs Spain and Portugal; price action in the sell-off price action validates the assessment that the ECB QE tapering risk was more misplaced in bunds than in other spreads
• In the U.K., take profit on Nov. 2017/May 2018 MPC OIS curve steepeners as this curve now prices a fair 50% probability of a hike between the two meetings; enter longs in November 2017 MPC OIS as the bar for a hike this year remains high despite the recent MPC split
  • Stay neutral on outright duration for the moment but have a medium term bearish bias

Deutsche Bank (strategists including Francis Yared)

• Central bankers have made relatively explicit statements that as financial conditions have remained easy, policy needs to be tightened, reducing the dependence on wages, inflation in the short term
  • Core inflation data needs to improve to prompt a more decisive sell-off
• Close Eonia 1y1y/4y1y steepener as no longer see room for the belly of the curve to sell off without upside surprises to inflation prints; continue to hold paid position in the belly of EUR 5s10s30s, long EUR 10Y breakevens
• In the U.K., hold 2s10s gilt steepeners as the curve remains flat to models, term premium in is depressed

BofAML (strategists including Sphia Salim)

• When the ECB announces an extension of QE into 2018, the bank may make some implementation changes, such as buying less Germany, increasing supra allocation, buying more sub-1-year Germann paper, even at EU40b/month
  • German 33% limit could be hit for Germany as early as March 2018 or as late as January 2019
• An increase of the EU Supras target to 15% of PSPP when buying is reduced to EU40b/month QE, assuming the share of other programs remains constant, would imply EU1.5-2b of additional monthly Supras purchases compared to market expectations, which would drive an outperformance vs bunds, especially in the long-end
  • Do not envisage a sustained sell-off beyond those levels without a clear re-assessment of the inflation and ECB rate outlooks

Barclays (strategists including Cagdas Aksu)

• Close short 10y bund trade following a 30bp rise in yields in the past two weeks; room for further sell-off remains given that positioning has not yet moved from long to short, while the spillover to risky assets has been minimal, and breakevens could be propped up by a turn in oil
  • See risk/reward for an outright short no longer as attractive; in order to capture further bearish moves, continue to hold onto reds/greens EONIA steepener and short May 18 EONIA outright

Morgan Stanley (strategists including Anton Heese)

• Revert to neutral from having been bullish on USTs and gilts ahead of the ECB Forum on Central Banking
  • In Germany, negative momentum, upside surprises in business cycle indicators, and movements in FX markets argue for running modest shorts in 2y Schatz
• Tactically, suggest selling bunds vs Treasuries and remain short 10y bunds on 2s10s30s, reflecting the view that the belly of the curve is most vulnerable to yields rising further given their historical relationship with front-end rates, realised inflation and realised vol
• Bunds have broken out of the range they have been trading in since December, which is significant because much of the sell-off over the last two weeks has been technical in nature, driven by positioning issues rather than a substantial reassessment of the monetary policy outlook
• In the U.K., recommend receiving 6m1y SONIA given expectation of weak economic data which should prevent the MPC following through on raising rates as much as the market currently prices

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 David Goodman