HALISTER1: EU RATES ROUNDUP: Selloff to Continue; Barclays, BofAML Disagree

EU RATES ROUNDUP: Selloff to Continue; Barclays, BofAML Disagree

(Bloomberg) -- Most analysts suggest EGB selloff can continue, bias toward short duration expressed via steepeners.
  • JPMorgan turns short, Deutsche Bank gives five reasons EGB weakness can be sustained; Morgan Stanley stays short gilts; Barclays, BofAML expect weakness to fade
  • Morgan Stanley (strategists including Anton Heese)
    • Continue to suggest investors remain defensively positioned in govt bonds; express outright duration shorts in the U.K., where reflationary factors have come into play
      • Potential these factors spill over to the euro area, relative to U.S., maintain underweight bunds vs USTs
    • New Austria 70y bond is marginally cheap, in yield and ASW terms as well as a broad comparison vs Belgium long- end
      • Given its additional convexity, 30s50 or 50s70s curve should ultimately be inverting
    • Since 50y BTP syndication, 30s50s curve has flattened, with 10s30s50s flys underperforming in the wake of rising volatility, as a result suggest remaining short 30y BTP on the 10s30s50s fly
      • Portugal still suffers relatively weak macro fundamentals, low nominal growth means the debt trajectory is vulnerable to shocks, recommend expressing this bearish view via short 5y PGB vs 5y BTP or bund
  • Barclays (strategists including Cagdas Aksu)
    • Recent cheapening of EURUSD, back up in market based inflation expectations, speculation around ECB QE tapering has helped bund market sell off, among other global factors
    • Believe underlying growth and inflation picture have not turned decisively positive enough to justify sustainably higher bond yields in the EUR market yet
      • Maintain Ireland 10s30s steepeners, short 30y BTP versus Germany and long 7y French ASW recommendations
    • In the U.K., MPC are confronted with firmer rate profile, stronger GDP, weaker currency; medium-term risks to inflation remaining elevated is “too complacent” to price no easing in 2017, risk reward favors receiving near-dated OIS
  • Deutsche Bank (strategists including Francis Yared)
    • See five reasons why the recent sell-off is sustainable: improving macro data; breakevens lead, which means base effects having a positive impact on inflation expectations; long-term rate expectations still benign; short-term technical indicators don’t look overstretched; the market is not more hawkish than the central banks
    • Sustainable nature of the sell-off suggests maintaining key risk premium normalization trades in the U.S. and Europe
      • Hold USD 2s5s steepener, USD 5s10s steepener hedged with 17% short in 2s, Germany 10s30s steepener and long 10Y breakevens
    • Given the repricing of the EUR front-end, with the trough in Eonia now in Dec-17, exit the paid position in EUR 1Y1Y
  • JPMorgan (strategists including Fabio Bassi)
    • Selloff supported by fundamentals, can continue if parallels with last year prove accurate; 10s30s steepeners are most attractive bearish proxy, as are reds/golds EONIA curve steepeners
    • Given increased volatility, recommend scaling back on peripheral tighteners, keep core wideners; close longs in long 15Y Italy vs Germany, hold longs via Spain and Ireland vs core
    • Turn bullish on the front-end, but await better entry levels
    • In the U.K., retain a short duration bias on short-term momentum, long-term 10Y gilt valuations, potential repricing of term premia; enter 2s5s gilt curve steepeners; in the front-end, enter Feb. 17/Aug. 17 MPC OIS curve flatteners
  • Citi (strategists including Harvinder Sian)
    • 10yr bund target remains 0.3%, on steepening, Buxl cheapening, periphery underperformance and USD, JPY rates outperformance; Fed tightening bias aids ECB taper risk on firm USD FX
    • DBRS’ affirmation of Portugal’s rating reinforced PGB spread tightening, see limited further upside from here; don’t fade BTP underperformance vs Bonos, which in part may reflect relative fundamentals given correlations to PMI differentials
      • Receiver swaptions currently offer excellent structural disinflation hedge opportunities: MORE
    • In the U.K., growth, inflation are likely to be revised higher by the BOE, most important will be the MPC’s guidance on easing bias and their tolerance for inflation
      • Duration remains a tough call, take profits on 10s30s flatteners, maintain longs in 30y gilts vs Bunds on ECB risks
  • BofAML (strategists including Ralf Preusser)
    • Short duration positioning is at an extreme; in the absence of new information on QE, EUR duration will remain well supported on ECB maturity extensions, global yield grab, cyclical growth headwinds, through political risks the periphery
      • Fade the tapering story, expect 10s30s bunds flatteners to reassert themselves, find value in the 15y part of the French curve
    • After being cautious on periphery, reduced political risks and banking sectors point to a tactical long peripheral view *** With risk events such as the Italian referendum, ECB meeting, completion of Italian bank recapitalizations concentrated in December, see value in carry in November
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
Harvinder Sian (Citigroup Inc)

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