HALISTER1: EU RATES ROUNDUP: No Duration Bias; Brexit, USD Rates Impact

EU RATES ROUNDUP: No Duration Bias; Brexit, USD Rates Impact

(Bloomberg) -- The prospect of higher rates in the U.S. may bring greater scrutiny to peripheral spreads, while Gilts may offer a good risk-reward play ahead of the U.K.’s EU referendum, analysts write.
  • JPMorgan (strategists including Fabio Bassi)
    • Hedge risk of further US–driven sell-off with German 6s14s steepeners, reds/5Y5Y conditional bear steepeners, long 2s5s10s OATs
    • Conditions warrant further expansion to stimulus, and extension of asset purchases beyond March 2017 looks likely; hold 10s30s German flatteners, long Sept-16 ECB OIS
    • Continue to favor cheap EGB spread wideners as hedges for rising headline risks; go short 2Y Spain vs Germany, short front-end Ireland vs France, short 4Y Netherlands vs Germany
    • Recent increase in “remain” lead in EU referendum polls has seen markets reprice Brexit risk; turn neutral on duration, take profit on long 10Y Gilts vs USTs
  • Deutsche Bank (strategists including Francis Yared)
    • Very front-end of US curve close to being fully priced given data available; exit tactical cross-market trades, long EUR 10Y real rate vs. USD, long UK 5Y5Y vs UST
    • Prospect of higher U.S. rates, concerns about Italian banking system may pressure periphery, move bullish BTP/Bund spread flattener from 5s10s to 10s30s
    • Eurozone 50Y bonds attractive, recommend 30s50s flatteners in France; increased supply of long bonds, attractiveness of 50Y support further cheapening in Buxl vs swaps
  • Morgan Stanley (strategists including Anton Heese)
    • Maintain long 10Y Gilts vs 5Y USTs; lack of premium in price given Brexit concerns
      • 10Y Gilt to perform OK in a “remain” scenario, outperform significantly on risk off-should there be a leave vote
    • Peripheral spreads have been tightening on falling Brexit fears, lack of supply; significant probability that Italy decides to issue new 50Y, which could cause spreads to re-widen
    • Prefer long positions in semi-core long-end vs core, given front-loading of long-end issuance, steepness of semi-core; buy RAGB 1.5% 02/2047 vs DBR 2.5% 08/2046 at 49bps
  • RBS (strategists including Andrew Roberts)
    • Big global event risks of 2016 approaching, close enough to dominate action from now on; BOJ, EU referendum, ECB LTRO allotment, Spain general election
    • Expect BOJ action, June LTRO take-up estimated at EU830b, bullish for bunds
    • If U.K. votes to remain in the EU, see 60/70bps off 10y BTP/bund spread, vast majority coming from lower BTP yields
      • In event of “leave” vote, spotlight would turn to European countries which may have their own referenda; IPSOS MORI poll shows 60% of Italian citizens want own EU referendum
    • Japanese investment in foreign bonds supports long end of European sovereign curves, particularly France, UK; maintain 5s15s OAT flattener, long 30Y BTPs
  • Citi (strategists including Harvinder Sian)
    • Not convinced convexity value is driving long-end EGBs, investors should look to extend cash-cash to the super longs to exploit the steepness, reduce longs in Spain, Belgium: MORE
    • Parliamentary vote in Greece likely to pave the way for bailout fund release; ongoing improvement in sentiment toward Greece likely to support periphery spreads
  • BNP (strategists including Eric Oynoyan)
    • With secondary-market activity thin, technicals have heightened importance, failure of the Bund to break through 0.10% triggered setback, strengthened by a hawkish FOMC Minutes
    • Limited potential to Bund yields to rise further, 0.25%-0.28% area should cap, rates in 2Y may rise further as ECB rate cut expectations decline further
  • Maintain 2s10s OIS flattener, keeping payer EUR 40Y10Y vs receiving 30Y10Y
  • Barclays (strategists including Cagdas Aksu)
    • Still see it as difficult for Bunds to sell-off in near term; maintain short 10Y Bunds vs USTs
    • Peripheral spreads have been consolidating lately, still see no good risk/reward at current levels ahead of the UK referendum
      • Belgium 4Y-6Y currently trades richer than France, Finland; unlikely to stay rich given expected tapping of new 7Y benchmark in June, switches out of Belgium now look attractive
    • See LTRO-II takeup at EU420b, large part due to repayments of existing LTRO; good participation may support confidence banking sector, economic outlook rather than money markets
  • Unicredit (strategists including Elia Lattuga)
    • Issuance at extra-long tenors is likely to slow significantly over the coming months; favor long-end Spain, OATs and BGBs vs swaps
    • Supply to slow given EMU sovereigns have already met about half of their target funding needs for 2016, and as U.K. referendum and summer illiquidity approach: MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Fabio Bassi (JPMorgan Chase & Co)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Elia Lattuga (UniCredit SpA)

Topics
BFW EU Rates Analyst Wrap

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