HALISTER1: EU RATES ROUNDUP: Steepener Bias Remains; JPMorgan Turns Bullish

EU RATES ROUNDUP: Steepener Bias Remains; JPMorgan Turns Bullish

(Bloomberg) -- Steepeners bias remains, as was the case heading into the ECB, though JPMorgan turns bullish European rates with a bias toward flatteners.
  • Citi (strategists including Harvinder Sian)
    • ECB QE extension is practically a given, but a slower pace of QE may be underestimated by the market given an evolving reaction function toward buying time
    • Achieving 2% inflation on a sustainable basis still looks out of reach which makes it prudent to use QE tactically
    • See bear-steepening risk into the December ECB meeting in anticipation of a slower QE pace and technical adjustments
    • Prefer GBP 1y1y30y to establish long vega and positively rolling implied vol strategies: MORE
  • Barclays (strategists including Cagdas Aksu)
    • ECB kept options open, still likely to extend QE beyond March 2017 at Dec. meeting, though Draghi did not completely rule out the chance of a small reduction in the pace of QE
    • Prefer to stay positioned for higher term, credit risk premium in long-end of EGB curve through the periphery, as credit risk premium remains low given upcoming political risks, macro backdrop
      • Continue to hold Ireland 10s30s steepeners, short 30y BTP vs Germany and long 7y France ASW
  • JPMorgan (strategists including Fabio Bassi)
    • Draghi’s rhetoric was slightly more dovish than expected, opens small window for carry trades
    • Bias turns to tactically bullish duration as the fear of tapering gets repriced though valuations remain expensive
    • Recommend entering 2s5s flatteners to express a bullish view, exploit excessive steepening; hold bias toward 10s30s, 15s30s flattening
    • Recommend scaling into overweight Italy, current valuations give adequate protection into the Dec. 4 vote
    • Front end Eonia prices ~5bps of cumulative easing by late 2017/early 2018; expect policy rates to remain firmly on hold, stay neutral at the front end of the curve
  • Deutsche Bank (strategists including Francis Yared)
    • ECB bought more time, Draghi’s press conference has not altered expectation of no tapering, but a depo floor removal at Dec. meeting
      • Maintain the same strategic bias toward higher term premium in core rates
    • Recommend Italy 10s30s flattener given increasing concerns about referendum, political uncertainty in case of a ‘No’ vote
    • Bearish case for U.K. fixed income remains valid as upcoming policy mix likely to see a shift toward additional fiscal support
      • After recent richening of 30Y and vulnerability of 10Y point to retrace given the recent cheapening, exit short 30Y gilt vs. U.S., enter a UKT 10s30s steepener
  • Morgan Stanley (strategists including Anton Heese)
    • Bond market Indicators have grown more bearish over the last week, now recommend short positions in all four G-4 rates markets
      • Highest conviction short is in Europe as growth data has been surprising to the upside, forcing a moderation of ECB easing expectations
      • Continue to suggest investors short gilts outright and short bunds vs USTs
    • Recent outperformance of France has been partly reflected by the cheapness of BTPs, also due to the favorable October seasonality; maintain 10s30s OAT flattener vs bund to express relative cheapness 30y OAT vs bund
  • Commerzbank (strategists including Christoph Rieger)
    • Take profit on 5s10s swap spread steepener given adjustments to the ECB QE framework largely discounted
    • Hold on to breakeven wideners as the global reflation theme has further to run, positive carry over the coming months and mature issuance progress
    • Nascent reflationary spirits are highly contingent on extended and comprehensive ECB support and will require QE reassurances in December
    • Selling EUR rates vega optionality favorable for investors seeking to stabilize long-term portfolio returns and/or cash flows to better match minimum income requirements: MORE
  • HSBC (strategists including Bert Lourenco)
    • ECB ideally needs to construct higher yields for Germany to proceed with QE while keeping periphery, credit spread and the currency low; continue to advocate a steeper IRS curve and buying volatility
    • Higher oil prices have helped push up inflation expectations which should pressure nominal rates; sell 30Y bunds and PGBs vs swaps due to PSPP uncertainty, program constraints
    • Slowing year-end issuance volumes support lower EUR-USD Xccy basis, continue to favor front-end of the curve
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
JPM US (JPMorgan Chase & Co)
2539Z GR (European Central Bank)

People
Harvinder Sian (Citigroup Inc)
Anton Heese (Morgan Stanley)
Bert Lourenco (HSBC Securities Inc)
Cagdas Aksu (Barclays PLC)
Christoph Rieger (Commerzbank AG)

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