HALISTER1: EU RATES ROUNDUP: TLTRO-II May Aid Carry Trades in Periphery

EU RATES ROUNDUP: TLTRO-II May Aid Carry Trades in Periphery

(Bloomberg) -- Analysts turn less bullish on EUR front-end, more positive on peripheral following ECB’s easing measures; some focus on large EGB redemptions coming in April.
  • Citi (strategists including Harvinder Sian)
    • ECB’s bazooka backfired, rate cuts taken off the table, further easing to be priced out, then buy duration; periphery is aided by TLTRO-II carry trades, correlation to corporates
    • Recommend paying Dec ECB Eonia at -0.40% (which implies a 6bps rate cut), target -0.34%, stop -0.45%
    • Despite more ECB “easing”, bund yields to mildly rise during second half of the year, retain target ~0.05% in near term
    • ECB dialing down the market expectations future depo rate cuts, bullish for the long-end; recommend receiving EUR 5y5y at 1.35% (currently 1.27%), target 1.05%, stop 1.50%: MORE
  • Barclays (strategists including Cagdas Aksu)
    • Post-ECB, now forecast end-2Q 10Y Bund yield at 40bps, expect volatile trading likely in a range of 10bps-70bpps over Q2
    • Remain neutral on duration, curve and periphery spreads near term; maintain short 7Y Belgium vs Ireland, Netherlands
    • April redemptions in EGBs will be very large, ECB’s higher purchase pace will mainly have to come in EGBs during April, should give some support to duration
    • Maintain bullish view on breakevens following ECB meeting; recommend going long 2Y euro HICPx, looks cheap vs forecasts, has underperformed on the micro curve in the recent rally
  • Deutsche Bank (strategists including Francis Yared)
    • Effectiveness of monetary policy declining with risk premium it is leaning against; ECB’s decision should still be supportive of credit, credit transmission mechanism, Eurozone economy; latest ECB will make it easier for Fed to press ahead with tightening
    • Exit short April sonia, maintain long EUR 10Y breakeven; enter a long 5Y BTP, which should benefit from ECBs’s credit easing measures, particularly 4Y LTRO
    • Enter Germany 10s30s flatteners; scarcity of German bonds will be exacerbated by increased QE; model suggests curve is ~6bps too steep; macro perspective argues for steeper curve, see this trade as tactical
  • RBS (strategists including Andrew Roberts)
    • Given ECB’s willingness to use its balance sheet, market implications are bullish for periphery, curve flattening
      • Recommend going long 30Y BTPs
    • ECB remains behind the curve, no reason to expect this is final ECB easing announcement of 2016; remain bullish bias in core, target maintained at -0.10% in 10Y bunds
    • Carry trade using new LTRO money is back on, recommend longs in PGB 2020, which offers good carry and roll
  • Mizuho (strategists including Peter Chatwell)
    • ECB structurally shifted away from cutting depo rate, makes monetary transmission more efficient; increase in QE will flatten curve, tighten spreads
    • QE, LTRO-2 to encourage yield grab, EUR 5Y5Y to head lower; recommend adding longs in 10Y France, currently 0.61%, target 0.40%, stop at 0.72%
  • Morgan Stanley (strategists including Matthew Hornbach)
    • Suggest investors go long duration across G-4 bond markets over the next 6-months; expect yield curves to bull-flatten by more than forwards in the U.S. and U.K.
    • Recommend U.S., U.K. 2s10s curve flatteners vs steepeners in Germany and Japan; prefer 5s30s flatteners in the U.K. vs 5s30s steepeners in Germany
    • Larger ECB purchases, upcoming redemptions, second round effects from new LTROs should support sovereign spreads; recommend tactical longs in 5Y BTPs vs Bund; France 10s30s flatteners vs Germany
      • Longer term still concerned about political risks, weaker growth; spreads may widen out in second half of 2016
  • SocGen (strategists including Vincent Chaigneau)
    • Stick to small long G-4 duration, given ongoing dangers for the economy, limited near-term upside for oil prices, risks to financial stability
    • See limited scope for much follow through weakness in 5Y EUR swap rates, after the ECB; retain cautiously positive view on non-core bonds, despite the deteriorating credit metrics: MORE
  • BNP (strategists including Eric Oynoyan)
    • Setbacks that followed most previous ECB rate decisions proved short-lived, and paved the way for decent rallies
    • Decision to conduct larger monthly QE purchases will also lead to larger purchase of sovereign debt, despite the extension of purchases to non-financial corporate bonds
    • See more downside on ERU6 and ERZ6 future contracts: MORE
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Harvinder Sian (Citigroup Inc)
Andrew Roberts (Royal Bank of Scotland Group PLC)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Francis Yared (Deutsche Bank AG)

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