Halister News

(Bloomberg) -- While consensus short 10y Bund into ECB didn’t work out as planned, many strategists continue to hold onto bearish biases in European rates.

• Deutsche Bank rolls short 10y Bund into a new short 5y, BNP also holds short 5y and recommends adding paid EUR 5y vs USD; Barclays holds short 10y, as does NatWest Markets, while offering 7 (or 8) reasons not to fade the global rates selloff
• Citigroup bucks the trend and removes short-term bearish bias on Bunds, instead favoring carry trades in EUR swaps and long bund ASW into year-end

Citigroup (strategists including Harvinder Sian)

• Draghi said there will be “no sudden stop" to QE, infers a minimum of another 3 months after Sept., which suggests favoring carry trades; prefer receiving EUR 2y fwd 2s5s10s or 3y fwd 5s7s10s for carry
• QE extension supports Bund ASW richening; expect an ECB-led duration squeeze as buying continues at EU60b per month into longer maturities this year
• Macro conditions are leaning more persuasively toward higher yields and steeper curves next year as strength of economic data forces ECB neutral rate higher

BNP (strategists including Eric Oynoyan)

• Net supply in 2018 rises by EU310b once considering PSPP purchases; QE will likely end in autumn 2018, direct impact will be removal of 65bps embedded QE premium priced in 10y Bund yield
• In the U.S., Treasuries have been supported since April from renewed buying interest out of Asia, while fast money has built up a significant short position on the U.S. 5y, increasing the risk of a short squeeze
  • Recent 30bps widening on the USD/EUR 5y spread in swaps is an opportunity to pay EUR 5y swap vs receive USD 5y swap, now at 186.5bp, targeting 130bp, stop 200bp; also stay outright short Bobl

Deutsche Bank (strategists including Francis Yared)

• Macro news remains supportive of expectations of gradual policy normalization, continue to hold bearish bias, merge short 10Y Germany and paid 1y1y into a short 5Y Germany
• Given expectation that the maturity of German PSPP purchases will increase as QE continues, also continue to hold German 5s30s flattener vs. Eonia
• In the U.K., aggressive communication of subsequent rate hikes will be limited by ongoing uncertainty over the economy; stay received in May 2018 Sonia as a hedge against a slower hiking trajectory than currently priced

Barclays (strategists including Cagdas Aksu)

• ECB policy revision was in line with consensus, while Draghi projected a very careful tone, making the QE reduction announcement appear dovish
• Source of any Bund sell-off might not be the ECB in the short term, but this week’s BOE, new Fed chair decisions are still a bearish risk
• Hold onto short 10y Bund outright, reds/greens steepener and short 10y Netherlands ASW versus EONIA trades
  • Roll out cheap technical hike trade from paying October 2018 to December 2018 EONIA, given the very front-end rally

NatWest Markets (strategists including Jim McCormick)

• Reasons not to fade global fixed-income sell-off; reduced central bank balance sheet purchases, changing central bank reaction functions, personnel changes at the Fed, strong global growth, abnormally low risk-asset volatility, near-term upside inflation risks led by oil, positioning not yet short, and possibly U.S. tax reform
  • Stay short 10y Bunds
• Bullish Spain and Italy vs Germany as new electoral law in Italy considerably reduces political risk, while elections in Catalonia appear to be the most likely scenario, which should allow things to settle down for markets
• In the U.K., look for a hawkish BOE hike, base case being a 7-2 vote and signalling that a ‘majority’ of members will continue to see the case for further tightening in coming months; stay short 10y gilts target 1.80%

To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net Keith Jenkins