HALISTER1: Sell Front-End Receivers in EUR Rates, Buy Long-End Payers: HSBC

Sell Front-End Receivers in EUR Rates, Buy Long-End Payers: HSBC

(Bloomberg) -- EUR rates are vulnerable to short-term back-up across the curve as ECB PSPP will slow during August’s summer break, and with easing priced into the front-end looking “excessive”, HSBC strategists including Bert Lourenco write in client note.
  • Look to engage in trades that will benefit as market prices out aggressive depo-rate cuts, though also want a vol overlay as top-left looks dislocated
    • Recommend selling short-end receivers, buying long-end payers
    • Buy 6m2Y ATMF receiver vs selling ATMF -3bps, -6bps at zero cost; stop at -8c, target 15c, positive carry
  • See limited scope for rate cuts in weeks ahead, expect inflation numbers to rise in coming months, PSPP purchases will be at their lowest over Aug.
  • With new LTROs extending out to four years, recommend positioning for higher rates beyond this maturity
  • Carry of paid positions in 5Y-10Y sector is onerous, so recommend paying EUR 8Y rate swap 4Y forward, entry 85bps, target 110bps, stop 70bps
  • NOTE: Analysts at Deutsche Bank, JPMorgan and Citi see front-end of Eonia curve too aggressively priced for future rate cuts
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Bert Lourenco (HSBC Securities Inc)

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