HALISTER1: Target 10Y Gilt/Bund Spread Narrowing to 75bp on Policy Gap: SG

Target 10Y Gilt/Bund Spread Narrowing to 75bp on Policy Gap: SG

(Bloomberg) -- Predicting how the gilt/bund spread will evolve is mainly a call on the forward monetary policy gap as proxied by the short sterling/euribor blue spread, Societe Generale strategist Jamal Meliani writes in client note.
  • Buy 100 Sept. 2016 gilt futures at 129.50 vs selling 88 Sept. 2016 Bund futures at 167.49; target 75bp, stop 110bp
  • SG’s economist is calling for a 25bp BOE rate cut as soon as 14 July, followed later by the reactivation of QE
  • By contrast, the 20bp of ECB deposit-rate cuts being priced by the forward Eonia curve by end-2017 is unjustified
    • ECB deposit-rate cut is a pure currency weapon, while cutting the deposit rate without lowering the refi rate would increase costs for banks
  • Other positives for gilts include seasonals and BOE gilt portfolio reinvestment policy
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Jamal Meliani (Societe Generale SA)

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