Marketing Communication
Euro Rates Weekly
Start of the big short?
Group Economics Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com
DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.
01 May 2015
10y Bund yields have jumped, which raises the question whether the Bund bubble is bursting We think it’s too early as we see no convincing reasons why yields should move higher We therefore remain bullish on Bunds and we hold on to our 10bps forecast We do expect a significant bounce in Q1 of next year A key trigger could be the 2016 March meeting as the ECB will add a year to its forecast horizon
And the supply monitor: Next week net supply will be positive with supply coming out of mostly core and semi core Bund yields have jumped off their lows
Our view on this is not yet. We think that the rise is only
Over the last few days, 10y Bund yields have risen sharply,
temporary as we see no convincing reasons why Bund yields
reversing much of the sharp decline seen since the ECB’s QE
could move consistently higher in the short term. We think that
programme began. Bloomberg even reported that the jump in
the most plausible explanation for the rise is an accumulation
yields has been the largest increase in 2y time. The closing
of several reasons coinciding in a short time frame. This
low for Bund yields was on 20 April, where they ended the
means that we remain bullish on Bunds.
session at 7bps. Since then, they have steadily climbed (and especially this week) to around 36bps. To compare, the current
What were the reasons of the spike in 10y Bund yields?
level is only 18bps lower than at the beginning of the year.
The spike may be partly related to some fears of an early ECB exit from QE given recent slightly better inflation and money
Bund yields have jumped in recent weeks
supply data. Eurozone HICP inflation was flat yoy in April
10y, %
according to the flash estimate, following -0.1% in March. But core inflation was steady at 0.6% yoy, still leaving it well below
0.6
the ECB’s goal for overall inflation in the medium term of close
0.5
to but below 2%.
0.4
Another reason which can have contributed to the rise in Bund
0.3
yields is that a fear of a Grexit is fading. Indeed, news on
0.2
Greece has been positive which may have sparked a relief 0.1
0 Jan-15
move in Bunds. But this can only explain part of the move. Feb-15
Mar-15
Apr-15
Also an increase of (longer dated) government debt supply could have fuelled an upward movement of 10y Bund yields.
Source: Bloomberg
Together with a lackluster German OBL auction, this rendered the bond market vulnerable. However, we note that supply
Has the short of our lifetime begun?
could dry up in the Summer and ECB buying will not stop.
Bund yields are still at extremely low levels given that the economy is recovering. The recent abrupt correction raises the
Finally, other reasons which are less tangible could also have
question whether the Bund bubble is bursting.
helped the move. One should then think of end of month repositioning and more importantly a less liquid market. We
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Euro Rates Weekly - Start of the big short? - 01 May 2015
have warned earlier that a negative side effect of QE is lesser
Low yields in 2015 but bounce in Q1 2016
liquidity in both the cash bond and future market (see here for
Forecasts of 10y Bund yields, in %
full publication). Since we see no signs that liquidity could improve in the coming periods, we also think that the market should brace itself for more violent moves. ECB President Draghi likely to dismiss exit worries We think 10y Bund yields will fall on the 3m horizon, and keep our forecast of 10bps. We furthermore expect low yields for the remainder of 2015 and only a slight increase to 30bps in Q4. ECB President Draghi will likely continue to dismiss QExit
1.5
1 0.5
0 2015 Q2
speculation in coming months as underlying inflationary
Q3
Q4
Old forecasts
2016 Q1
Q2
Q3
Q4
New forecasts
pressures are still weak, while the central bank will want to be really sure that the outlook has sustainably improved. In
Source: ABN AMRO Group Economics, Bloomberg
addition, we continue to expect that ECB purchases will lead to acute scarcity of core government bonds. Although the ECB can and will likely expand its eligible universe, this will not be a game changer. We think that the most likely and most effective
Supply monitor
expansion will be the inclusion of German Länder bonds. We
Next week net bond supply will be positive. There are no
do not think that the ECB will change its forward guidance, the
coupon and redemption payments scheduled. Gross supply
ECB floor of -20bps, the linkage of its purchases to the capital
will come out of Austria, Germany, France and Spain.
key or the CAC limit per bond issuance. On Tuesday, the Austrian Treasury will issue the RAGB Bund yields to rise significantly in 2016
October 2023 and September 2021 for EUR 1.1bn.
We do expect a significant change in mood next year as the
On Wednesday, the German DFA will auction a new Schatz.
recovery becomes more established and underlying
The DFA will sell EUR 5bn of the new BKO June 2017.
inflationary pressures build. We think that the ECB will end its
Spain and France will enter the primary market on Thursday.
programme by September 2016, and it will no longer be able to
Details for both countries will be published at a later stage.
dampen exit speculation. A key trigger could be when the ECB extends its forecasting horizon to 2018 at its March 2018 meeting. Those forecasts should signal that ‘the mission is accomplished.’ We therefore forecast a jump of 10y Bund yields in Q1 2016 as investors will not want to be standing at the platform when the train leaves. As a result, we have raised our 10y Bund yield forecasts in 2016, to 1.4% by year end, from 1% previously.
3
Euro Rates Weekly - Start of the big short? - 01 May 2015
Summary of Rate Views and Trade Ideas
Total PnL open trades (bps) Total PnL closed positions (bps) Total PnL (bps)
Perform ance is in bps, positive PnL is show n in black
Open trades Type of Trade Rationale Outright We expect 10y bund yields to drop further on the back of scarcity as well as liquidity constraints.
Trade Idea Buy DBR February 2025
ASW
Scarcity as well as more core bonds trading below the floor of -20bps will drive the ECB up the curve. This should spark outperformance of these bonds in ASW terms.
Curve
The ECB will buy up to 30y. Supply imbalances and the search for yield will bias 10s30s in core bond markets to flatten.
Credit
-7 21 14
Start date 2/4/2015
Entry 37
Now 37
PnL 0
Buy DBR August 2046
2/4/2015
-28
-11
-16
Buy DBR August 2046 vs Sell DBR February 2025
2/4/2015
60
50
10
Favour credit long due to QE. Outperformance is likely via outright ECB Buy BGB June 2046 vs Sell DBR July 2044 purchases and search for yield (portfolio rebalancing effect). In semi core we prefer Belgium over France. 30y OLO-Bund is more interesting than 10y OLO-Bund.
2/4/2015
44
45
-1
Credit
Same rationale as above. In periphery we prefer Spain over Italy given better Buy SPGB April 2025 vs Sell DBR February 2025 economic fundamentals.
2/4/2015
111
109
2
ASW
We judge a Grexit will not occur, which would support tightening of EFSF bonds.
Buy EFSF July 2044
2/13/2015
4
9
-5
Credit
We think that L채nder still offer attractive value vs Bunds. We also expect L채nder bonds to be included in the PSPP programme
Buy NRW October 2025 vs DBR February 2025
4/24/2015
23
19
4
Closed positions Type of Trade Rationale Credit EIB trades tight vs DSLs but still offers an attractive pick up in the long end.
Trade Idea Long EIB March 2042 vs Sell DSL January 2042
Start date 2/13/2015
Close date 4/1/2015
Entry 28
Close 7
PnL 21
Key events Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Monday Monday
04/05/2015 04/05/2015
03:45:00 10:00:00
CN EC
PMI manufacturing - index (HSBC) PMI manufacturing - index
Apr F Apr F
49.2 51.9
49.4 51.9
Tuesday Tuesday Tuesday
05/05/2015 05/05/2015 05/05/2015
14:30:00 16:00:00
US US EC
Trade balance - USD bn ISM non-manufacturing, index European Comission Economic Forecasts
Mar Apr
-35.4 56.5
-40.2 56.1
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015 06/05/2015
3:45:00 10:00:00 10:00:00 10:30:00 11:00:00 14:15:00 14:30:00
CN EC EC GB EC US US PL
PMI services - index (HSBC) PMI services - index Composite PMI output PMI services - index Retail sales - % mom ADP nat. employment report - thousands Output per hour nonfarm business sector - % qoq Reference rate - %
Apr Apr F Apr F Apr Mar Apr 1Q P May 6
52.3 53.7 53.5 58.9 -0.2 188.7 -2.2 1.5
53.7 53.5 58.7 -0.3 199.3 -1.8 1.5
Thursday Thursday Thursday Thursday Thursday Thursday Thursday
07/05/2015 07/05/2015 07/05/2015 07/05/2015 07/05/2015 07/05/2015 07/05/2015
08:00:00 09:00:00 09:30:00 10:00:00 13:00:00 14:30:00 21:00:00
DE CH NL NO CZ US US
Manufacturing orders - % mom Foreign currency reserves - CHF bn CPI - % yoy Policy rate - % Repo rate - % Initial jobless claims - thousands Fed Reserve consumer credit - USD bn
Mar Apr Apr May 7 May 7 May 2 Mar
-0.9 522.40 0.4 1.25 0.1 262 15.5
1.3 526.33
Friday Friday Friday Friday Friday Friday Friday
08/05/2015 08/05/2015 08/05/2015 08/05/2015 08/05/2015 08/05/2015 08/05/2015
08:00:00 10:30:00 14:30:00 14:30:00 14:30:00
DE GB US US US CN CN
Industrial production - % mom Trade balance - GDP mln Change in employment private employment - thousands Change in employment total - thousands Unemployment - % Exports Imports
Mar Mar Apr Apr Apr Apr Apr
0.2 -2859 129 126 5.5 -15.0 -12.7
0.3 -2300 223 225.5 5.4 2.9 -9.8
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
ABN AMRO
-0.5
1.5 2.0 0.4
1.13 0.1
0.1
15.7 0.5 223 225 5.4
4
Euro Rates Weekly - Start of the big short? - 01 May 2015
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