HALISTER1: EU RATES ROUNDUP: Steepener Bias Reinforced After ECB Outcome

EU RATES ROUNDUP: Steepener Bias Reinforced After ECB Outcome

(Bloomberg) -- Outcome of the ECB meeting has reinforced a steepeners bias from analysts; views on outright duration are more mixed, though skewed toward bearish.
  • Citi (strategists including Harvinder Sian)
    • Bearish move for bunds is nearly done, look to buy 10Y at 0.45%
    • EGB spreads remain vulnerable given reduced QE volumes, the return of supply in Jan., prospects for more rating actions and ongoing political event risk
      • Portugal looks to gains the least from the latest ECB meeting as there was no change in the PSPP issue limit
    • Removal of the depo rate floor, extension of eligible maturity range should engineer a bull steepening bias on the curve
      • Recommend investors buy the EUR DV01 neutral one- year forward 4s30s bull conditional steepener at zero cost
    • Cash-for-collateral facility does not reduce general collateral richening risk medium term, stay long OEH7 ASW against Eonia, from 17.6bps and still target 30bp (now 24.2bp)
    • ECB’s reaction function is geared toward buying time, avoiding deflation, containing spreads, but not hitting the inflation target in a timely manner; sell 5y5y HICPxT inflation swap at 1.70%, target 1.40%
  • Morgan Stanley (strategists including Anton Heese)
    • Measures announced by the ECB have an “ambiguous” impact on the level of rates, refrain from recommending outright duration positions coming out of the ECB
      • Curve trades are more attractive, recommend 5s30s steepeners; see continued ECB accommodation due to weak inflation outlook, which will be increasingly priced into 5y sector; long-end bund valuations vulnerable as ECB removes less duration from the market
      • Key risk to steepness is if the growth and inflation outlook deteriorate once again, leading to a bull flattening of the bund curve
    • Steepening view makes more sense in cash bonds (bunds) rather than swaps, as an alleviation of scarcity issues should have more impact on German paper
    • New securities lending facility should help to alleviate some of the collateral scarcity issues, expect German general collateral repo rate to face less year-end pricing stress and to provide a floor to where front-end German bonds should yield
  • Barclays (strategists including Cagdas Aksu)
    • Overall ECB package was comprehensive and dovish, this, combined with higher medium-term political risk premium in the euro area, should keep bund yields capped at 50bps unless Treasuries have another leg of notable sell-off from current levels
    • EUR long-end curve steepener was preferred ahead of ECB meeting, given many different policy announcement permutations should all lead to a steeper EUR curve
      • Mild signal for a slower purchase rate, drop of depo floor, globally higher long-end term premium should all help keep the EUR curve steeper for a while; hold Ireland 10s30s steepener
    • While political risks in Europe remain, in the near term the ECB’s overall new easing package was large enough to prevent a large spike in the political risk premium
    • Changes to securities lending program don’t address the structural issue of core collateral scarcity that will become more significant next year on the continuation of QE
  • BNP (strategists including Ioannis Sokos)
    • ECB’s decision to cut its monthly QE purchases from April and the removal of the deposit facility floor for purchases is likely to reinforce the curve’s steepening bias
      • Keep short positioning on the 10y area, hold 10s30s bund steepener
    • OATs benefit from higher liquidity and ratings, and a lower share of the country’s supply than OLOs; don’t see the current wide spread as warranted and expect OATs to richen gradually, hold long 30y OAT vs OLO
      • 30y OAT ASW has richened in the first three weeks of December each year since 2007, a repeat of this seasonal pattern would support OATs against OLOs
  • JPMorgan (strategists including Fabio Bassi)
    • ECB delivered comprehensive package with a ‘soft’ taper of purchases, counter-balanced with a 9-month extension; this combined with tweaks to PSPP, securities lending program is unambiguously negative for ultra long-end and neutral/bullish on the front end
    • Retain a bearish outlook on duration, tactically take profit on shorts in 10Y Germany following ECB meeting; reduced buying pressure in the 10Y+ sector to be significant, and as a result retain 10s30s steepener Germany and long greens vs 15Y
      • On the swap curve, changes in the QE modalities support wider swap spreads at the front end and a flatter swap spread curve, hold outright wideners via Mar. 17 Bund-OIS swap spreads; in vol, continue to recommend positioning for a steeper 2s10s EUR vol curve
    • In the U.K., expect the MPC to maintain its neutral bias in the Dec meeting, remain bullish on front-end duration via longs in 1y1y Sonia
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Harvinder Sian (Citigroup Inc)
Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Fabio Bassi (JPMorgan Chase & Co)
Ioannis Sokos (BNP Paribas SA)

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