HALISTER1: EU RATES ROUNDUP: Risk of Near-Term Bull-Flattening Post-BOJ

EU RATES ROUNDUP: Risk of Near-Term Bull-Flattening Post-BOJ

(Bloomberg) -- Most analysts continue to see near-term bull-flattening pressures.
  • BofAML (strategists including Ralf Preusser)
    • Believes QE will reassert itself as the driving factor for EUR rates and maintains core flattening view in 10s30s bunds
    • Steepeners are not the right trade if questioning the ECB’s QE resolve, especially now that JGB steepening risks have abated and the Fed lowered yet again its estimates of terminal rates
    • Remain neutral on peripheral bonds as the Italian referendum approaches, likelihood of new Spanish elections rises, concerns grow around Italian banks’ capital buffers and the idea that interest rates in the periphery in the absence of QE are unlikely to be consistent with debt sustainability
    • Enter March 2017 FRA-OIS widener as a cheap way to position for these rising risks
  • Deutsche Bank (strategists including Francis Yared)
    • Outlook for EUR rates should once again be largely driven by expectation of ECB QE extension by year-end
    • Remain short EUR 5Y, as the hurdle for further rate cuts in Europe remains high
    • Maintain long EUR 10Y breakeven, as they remain cheap vs models and there is upside risk to HICP this week, but exit the long bund ASW as it is close to fair value
  • JPMorgan (strategists including Fabio Bassi)
    • Hold medium-term duration shorts on valuations, positions, risk-reward and possible resumption of 10Y+ supply, but a macro trigger is still lacking; risk of further bull-flattening in the short term
    • Add exposure to periphery: long 15Y Ireland vs France, stay tactically short Portugal vs Cyprus
    • Most core spreads to Germany are too tight: add 20Y Austria short vs Germany
    • Turn neutral on the U.K. gilt curve, take profit on 10s30s gilt curve steepeners, stay short gamma at the front end
  • Citi (strategists including Harvinder Sian)
    • Perceived BOJ impotence and a penurious 0% 10Y JGB target are a bullish backdrop on yield-seeking behavior
    • EUR steepening risk remains from ECB parameter shifts (admittedly 2 months away) and prefers USD rates over EUR
    • Expect renewed 10s30s gilt flattening as pension fund demand should pick up on supply/contributions into 4Q: MORE
    • Continue to target 160bp for BTPs vs bunds with uncertainties related to the upcoming referendum; however, ECB QE is likely to continue to contain spread volatility
    • USD payer spreads and EUR receiver spreads are of interest in the context of under-rated delta risks in the two economies: MORE
  • BNP (strategists including Patrick Jacq)
    • Expect a bullish tone to develop in the coming weeks, along with flattening pressure on curves
    • Weaker growth and domestic concerns will firmly support core EGBs, aided by scarcity in the repo market
    • Supply and demand imbalance is key, October net supply will be strongly negative
    • EUR vols set to decline in the coming month, expect a decline in longer-to-shorter tail vol ratios and a steepening of the skew
  • HSBC (strategists including Bert Lourenco)
    • Wholesale redesign of ECB APP might not imply lower bund yields or swap rates and does not favour chasing EUR IRS yields lower
    • Tactically, favors a flatter PGB curve given the increase in 10Y yields of late relative to the front- end: MORE
    • Pay EUR 2Y fwd 5s15s20s, buy 1Y2Y GBP ATM receivers vs EUR: MORE
  • Morgan Stanley (strategists including Anton Heese)
    • BOJ and Fed have taken the idea of optimal control policy paths to the extreme, which should calm fears of bear-steepening yield curves for now
    • With few obvious catalysts in the short term, risk that yields drift lower, and curves flatter, as ‘carry & roll’ and ‘search-for-yield’ push valuations richer
    • Remain neutral on duration and most yield curves as political uncertainty should stymie another runaway bull flattening
    • Expects fundamentals to continue to push underperformance in Portugal and Italy vs Spain
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Anton Heese (Morgan Stanley)
Bert Lourenco (HSBC Securities Inc)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)

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