HALISTER1: Go Long 10Y UST Vs Italy as Pricing of EU Growth Too Low: UBS

Go Long 10Y UST Vs Italy as Pricing of EU Growth Too Low: UBS

(Bloomberg) -- Buy 10Y U.S. Treasuries vs Italy (or Spain) on rising EU event risk and lower terminal U.S. rate in the current cycle, UBS strategist Nishay Patel writes in a client note.
  • Expects U.S. to outperform Italy by 35-40 bps by year-end
  • UBS doesn’t anticipate a meaningful increase in UST yields, expecting 10Y to rise to 2% by end-2016, with overseas demand likely to remain strong
  • Market pricing of EU growth and inflation is far too low, making 10Y Bunds very expensive
    • Expects peripheral spreads to tighten vs Germany in the next 12 months
    • Target 10Y BTP/Bund to 90 bps
  • Entering new spread tightening positions near term is unattractive, given rising event risk
    • Risks, although not UBS’s baseline scenario: U.K. exit from the EU, formation of a leftist government in Spain, an escalation of the Italian banking crisis or another worsening of the situation in Greece
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Nishay Patel (UBS Global Asset Management Japan Ltd)

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