Marketing Communication
Euro Rates Weekly
Bund blowout halted
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.
08 May 2015
After the selloff, the rates market is licking its wounds and trying to get its footing back Market sentiment has changed but we still think that speculation on an QE exit is premature The violent market correction suggests that eurozone QE has become a textbook QE case We see room for a bounce back in the short term and see value in 2s5s of core bond markets We expect that volatility and lower liquidity will continue to rock the market
And the supply monitor: Net supply will again be positive. This could weigh on the market. Core supply is focused in 10y. Selloff halted in eurozone government bond market
Market sentiment has changed
For eight days in a row, yields of 10y Bunds surged. Only
As we discussed in our previous Euro Rates Weekly – Start of
today, the blowout halted as yields somewhat declined.
the big short (see here for full publication), it’s very difficult to
However the damage has been done. Bloomberg reports that
give one convincing reason which justifies the spike in yields.
this was the longest losing streak since 2000. As if this is not
Yes, we knew all along that QE was heavily distorting the bond
significant enough, the surge in yields has been relentless and
market. Yes, we were all aware that the value of 10y Bunds
violent. Only a mere three weeks ago the yield of 10y Bunds
was stretched at single digits basis points. Yes, economic data
reached an intraday low of 5bps. At the time, speculation arose
and inflation expectations are on the rise. Yes we knew that
when and not if 10y Bund yields would move into negative
the Bund bubble would eventually burst. But didn’t we all say
territory. Since then the opposite has happened. The yield on
that technical factors would trumpet improving economic
10y Bunds slowly climbed to 16bps and then in a matter of
conditions, at least in the short term? And do we really have
days jumped vigorously in one straight line. On top of this,
proof that QE is effectively raising inflation expectations to a
volatility soared as 10y Bunds moved with 20bps on a single
sustained level? It therefore surprised us that the market is
day. As a result, the 10y Bund yield is currently trading higher
already speculating about an QE exit. Especially as QE is a
than when QE was announced in January of this year.
marathon and we just started this race.
Surge of 10y Bund yields is halted
QE in Europe turns into textbook case?
10y, %
At the beginning of the year, we forecasted that the yield on
1
10y Bunds would reach a low of 10bps. With the benefit of hindsight we can say we were just about right, but only partly.
0.8
We got it partly right because we also thought that yields would stay low for the remainder of the year. To build our case we
0.6
compared the ECB QE programme with known examples of 0.4
QE in the rest of the world. Recent movements have been compared with QE in Japan, where yields grinded lower and
0.2
suddenly spiked. Volatility soared as well, probably reinforced
0 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15
by a thin market. We also looked at the US situation. In the US we described the relation between QE and 10y Treasury yields as buy the rumour, sell the fact. Yields grinded lower in
Source: Bloomberg
anticipation of QE but on announcement yields rose (see
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Euro Rates Weekly - Bund blowout halted - 08 May 2015
graph below). We argued that in Europe this would not be the
10s30s are still flatter
case since the setup of the QE programme is skewed towards
bps
purchases of AAA bonds and that it would create scarcity. This feature should push yields lower. Now, only 2 months after the ECB started to buy public sector assets under its QE umbrella,
100 80
yields have risen sharply. This could indicate that QE in Europe is becoming a textbook case, with only a slight lag.
60 40
US 10y yields and QE 10y, %
20 Nov-14
4.5
Dec-14
Jan-15
Feb-15 Mar-15
Apr-15
4.0 3.5 Source: Bloomberg
3.0
2.5 2.0
Core national central banks prefer to buy shorter bonds
1.5
In addition to the attractive level at which 2s5s is trading, there is also another reason, besides investors who are searching
1.0 08
09 Tapering
10 11 QE periods
12 13 Tapering dry run
14 10yr yield
for yield, why especially 2s5s can be interesting. From ECB data we know that core central banks have bought relatively more shorter bonds than their peripheral counterparts (see
Source: Thomson Reuters Datastream
graph below). We think this is a matter of preference and not
New world offers new relative value opportunities Now that yields have risen, investors who have stepped back will look at the relative value opportunities this new world offers. In the short term, we think that yields will grind lower as investors will cautiously step back in and as we expect that the ECB will stress verbally that QE is here to stay. Although we have to wait and see whether we will hit again lows seen in the first month of QE. Furthermore, we do see risks in lower liquidity and we expect more violent swings. When we look at bond curvature, core bond 2s5s look particularly interesting. Core 2s5s are now steeper than when QE started (see graph below). This is not always the case, for example see 10s30s.
supply induced. Since yields have gone up, the universe of eligible bonds has also increased. This means that national central banks can again buy shorter dated bonds. As yields on 2y bonds have remained relatively sticky, this means that 2s5s can flatten. For the same reason we judge 10s30s not to be attractive at the moment as national central banks do not have to move up the curve.
Total ECB PSPP holdings In EUR bn
In years
25
12
20
10 8
15
2s5s are steeper than when QE started
6 10
bps
4
5
40
2
0 30
0 NL
FI
FR
DE
AT
IT
Amounts bought (lhs) 20 Source: Bloomberg
10 0 Nov-14
Dec-14
Source: Bloomberg
Jan-15
Feb-15 Mar-15
Apr-15
BE
IR
SP
Maturity (rhs)
PT
3
Euro Rates Weekly - Bund blowout halted - 08 May 2015
Supply monitor Next week, net bond supply will again be positive. We estimate a positive net supply of around EUR 10bn. There will be EUR 2bn worth of coupon payments flowing back to investors. The majority of the coupon payments comes from Italian bonds. This will support the Italian auction. Supply will come out of Germany, the Netherlands and Italy. Core supply is focused in 10y. This could weigh on the already vulnerable market. On Tuesday, the DSTA will tap its 10y benchmark (DSL 0.25% 2025) for EUR 2 - 3bn. We will publish an auction preview on Monday. On Wednesday, Italy and Germany will come to the market. Details on the Italian auction are not disclosed yet. Germany will tap its 10y benchmark (DBR 2025) for EUR 3bn
4
Euro Rates Weekly - Bund blowout halted - 08 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
-44 21 -24
Start date 2/4/2015
Entry 37
Now 55
PnL -18
Buy DBR August 2046
2/4/2015
-28
-6
-22
Buy DBR August 2046 vs Sell DBR February 2025
2/4/2015
60
58
2
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
47
-3
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
113
-2
ASW
We judge a Grexit will not occur, which would support tightening of EFSF bonds.
Buy EFSF July 2044
2/13/2015
4
10
-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
18
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
Monday Monday Monday
18/05/2015 18/05/2015 18/05/2015
01:50:00 06:30:00 16:00:00
JP JP US
Tuesday Tuesday Tuesday Tuesday Tuesday
19/05/2015 19/05/2015 19/05/2015 19/05/2015 19/05/2015
10:30:00 11:00:00 11:00:00 11:00:00 14:30:00
Wednesday Wednesday
20/05/2015 20/05/2015
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015 21/05/2015
Friday Friday Friday Friday Friday Friday Friday Friday Friday
Period
Latest outcome
Machinery orders private sector - % mom Industrial production - % mom NAHB home builders' confidence index
Mar Mar F May
-0.4 -0.3 56.0
GB EC EC DE US
CPI - % yoy Core inflation - % yoy Trade balance external EU - EUR bn ZEW index (expectation economic growth) Housing starts - % mom
Apr Apr F Mar May Apr
0.0 1 22003.3 53.3 2.0
01:50:00 13:00:00
JP TR
GDP - % qoq Repo rate - %
1Q P May 20
0.4 7.5
03:45:00 10:00:00 10:00:00 10:00:00 10:00:00 10:30:00 16:00:00 16:00:00
CN EC EC EC EC GB US US
PMI manufacturing - index (HSBC) - flash PMI manufacturing - index PMI services - index Composite PMI output BOP Current account - EUR bn Retail sales - % mom Philadelphia Fed - business confidence - index Existing home sales - % mom
May P May P May P May P Mar Apr May Apr
48.9 52 54.1 53.9 13.8 -0.5 7.5 6.1
Business confidence manuf. - index Consumer confidence - index Ifo - business climate - index Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy Markit - Flash PMI Policy rate - %
May May May Apr Apr Apr Apr May P May 22
101.0 0.0 108.6 0.2 1.8 0.2 -0.1 54.1 80.0
22/05/2015 08:45:00 FR 22/05/2015 09:30:00 NL 22/05/2015 10:00:00 DE 22/05/2015 14:30:00 US 22/05/2015 14:30:00 US 22/05/2015 14:30:00 US 22/05/2015 14:30:00 US 22/05/2015 15:45:00 US 22/05/2015 #N/A Field Not Applicable JP
Key Economic Indicators and Events
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Consensus
0.4
0.0
ABN AMRO
5
Euro Rates Weekly - Bund blowout halted - 08 May 2015
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