HALISTER1: EU RATES ROUNDUP: Neutral Rates Duration, Too Many ECB Options

EU RATES ROUNDUP: Neutral Rates Duration, Too Many ECB Options

(Bloomberg) -- Many analysts remain neutral on EUR rates duration ahead of ECB meeting this week, given the variety of policy options, potential outcomes.
  • Barclays (strategists including Huw Worthington)
    • Remain neutral on outright duration and on German curve; variety of options ECB has mean risk/reward limited
    • Hold short bund ASW vs Eonia; see this as good way to express short duration view
    • Avoid peripheral exposure, despite prospects for further ECB easing; focus on EGB rates with limited downside in risk-on environment, upside if spreads become vulnerable; continue to recommend short 7Y Ireland and Belgium vs long Netherlands
    • ECB will look to avoid market disappointment, risks towards further rally in 1Y1Y Eonia and gradual flattening of longer-dated Eonias
  • Citi (strategists including Harvinder Sian)
    • Duration and periphery can rally on the March ECB meeting as little is priced for QE upsizing, though don’t expect even a EU20b increase in QE to prompt a deep direction move as in the past
    • Recommend tactical longs in EMU spreads into the ECB; various EMU spreads remain above 12-month avg levels; analyzing carry and roll, RV, current entry levels, prefer 7Y Bono/Bund spread tighteners
    • Recent volatility in swap spreads have been influenced by large contribution from cross-ccy basis; recommend buying DU/Eonia at 7.5bps, target 15bps, stop 5bps
  • BNP (strategists including Patrick Jacq)
    • Improving risk appetite, supply outlook not supportive for euro-area bond markets ahead of ECB meeting
    • Following last ECB meeting, bond markets suffered a selloff, driven by profit-taking, disappointment with policy measures; see risk of similar setback this time
    • Market now positioned for more-than-10bps cut in depo rate, further rate cuts discounted show ~30bps of cuts in next 12-months, raises risks that markets will be disappointed
    • Recommend selling ERU6 and ERZ6, pay EUR 2s5s swap steepener: MORE
  • RBS (strategists including Andrew Roberts)
    • Expect ECB to cut depo rate 20bps, increase QE EU10b-15b; remain bullish high quality EMU fixed income, prefer roll down trades, highest roll is EUR 5Y1Y at 8.1bps over 3-months
    • Stop out of short 10Y BTP amid increasing focus on QE as policy tool, better U.S. data, slower decline in global data
    • CTAs may be close to limit long in bunds, risk of position reversal is low, requires abrupt reversal to see CTAs cutting positions aggressively
    • If ECB depo rate limit on QE is relaxed, short-end German bonds can be squeezed further, become more special, performing both outright and vs Eonia; recommend long 04/2021 bobl at -0.37% 3-month roll is 2.6bps, target -0.67%, stop -0.22%
  • Morgan Stanley (strategists including Matthew Hornbach)
    • Remain neutral on duration in USTs, bunds, gilts; ECB, BOJ, Fed, BOE meet over next two weeks; ECB meeting is difficult risk event given variety of possible outcomes, high market expectations
    • Market pricing in front-end may be too aggressive; don’t recommend shorts given ECB likely to cut next week, potential for unanticipated policy measures, continued weakness in growth, inflation
  • Maintain Sept-16/Dec-16 Eonia flatteners, target -6bps, stop 2bps; if ECB cuts aggressively, market may price future hikes, less aggressively and market may pare current expectations
  • Deutsche Bank (strategists including Francis Yared)
    • Unless ECB delivers over EU10b increase in QE pace, improving risk sentiment, stabilization in Euro-zone data, level of core rates, make it difficult to be long core rates
    • 10Y BTP yields at low end of recent range ~1.4%; weakening BTPs/bund directionality unlikely to be sustained in a selloff; see limited room for this spread to tighten without tightening in credit spreads; exit long 10Y BTP trade
    • If ECB implements two-tiered depo rate, remunerates 50% of excess reserves at refi, 50% at depo rate, front-end could selloff despite 20bps depo rate cut; current expectations are elevated; recommend being short April ECB Eonia
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Huw Worthington (Barclays PLC)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)
Matthew Hornbach (Morgan Stanley)

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