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Fixed Income Strategy Weekly

ECB modifies its QE communication


- US growth robust but imbalances grow
- US job growth at 313k in February
- ECB amends policy commitment, rules out QE increase
- Neutral duration stance in both euro area and the US
- Italian BTPs ignore political stalemate

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Markets’ muted response to Italy’s political shock


- Limited market reaction to the outcome of Italian elections
- Bund and T-note yields near fair values
- ECB; BoJ: status quo expected this week
- Neutral duration stance on rates
- Hold Spain and Portugal vs. Italy bonds

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T-note yields move up, high yield getting hit


- US stock indices have lost about 10% from end-January highs
- US 10-year yields about 2.90%
- Peripheral bonds weather stock market turbulence
- Back to neutral on Treasuries
- Sell Bunds, Gilts
- High yield and emerging bond spreads shoot higher

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Tensions building in US Treasury bond markets


- T-note yields hit 2.85%, whilst Bund yields trade above 0.70%
- Solid job growth in the US
- Upswing continues in the euro area (GDP growth at 2.7%y)
- Keep a bearish stance across major bond markets
- Sovereign and credit spreads stable, despite CDS indices flashing bearish signals

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Tensions mount in government bond markets


- US dollar weakness extends on increased imbalances
- US growth at 2.6qa in 4Q17 on strong consumer spending
- Draghi holds policy unchanged
- Bund yields at 2015 highs, warrants bearish stance
- Spain, Portugal keep on rallying

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Spain upgraded by Fitch, rally in credit continues


- US yields at 2014 highs
- US government shutdown begins
- ECB will have markets waiting for action
- Tactical neutral stance on Tnote, short stance in Bunds
- Fitch upgrades Spain to A-, spread within 90bp
- Significant corporate bond outperformance

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Risk-on start of year as dollar weakens


- US: consumer spending drives growth in 4Q17
- Twin deficits weigh on USD
- Germany: budget surplus hits 1.2pp of GDP in 2017
- Hold a short stance on TNotes and Bunds
- Peripheral bonds in high demand
- High yield credit and emerging bonds outperform

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Risk-on start of year


- High growth in the US and in the euro area
- Inflation was 1.4%y in December
- Short stance in US Treasuries amid flattening pressure
- High yield and emerging bonds outperform

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Neutral stance as year closes


- Fed : three rate hikes likely in 2018
- ECB: 2020 inflation at 1.7% keeps QE options open
- Curve flattening last week
- Hold neutral stance in T-note and Bunds
- Portugal upgraded by Fitch

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Fed to raises rates this week


- Bund yields dip below 0.30%
- Fed to hike rates by 25bps this week
- Year-end tensions on USD funding
- Bund, USTs: neutral duration, 10s30 steepener
- Bonos underpeforme

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Neutrality prevails in bond space


- US growth revised up in 3Q17
- Unexplained rise in eonia rates
- Hold neutral duration stance in Bund and Treasuries
- Sovereign, credit outperform

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Neutral stance on rates


- Robust growth in euro area, time to deal with NPLs
- Yield curve flattening continues
- Neutral stance in major bond markets
- Fade the rally in French OATs

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Bond yields retreat amid profit-taking in high yield


- Treasury yield curve flattens further
- US CPI inflation at 2%, robust growth conditions
- Neutral stance on Bunds and Treasuries
- Credit spread widening, profit-taking in high yield space

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Pullback in risky assets


- Strong growth in the US and in Europe
- Oil prices near their cycle peak?
- Short stance in Bunds
- Profit-taking in speculativegrade bonds

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Powell to assure smooth transition at Fed


- Powell will be the next Fed Chair
- Robust growth in Europe and the US
- Short bias in Bunds, long US bonds
- Credit outperformance continues

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Draghi keeps the party going


- ECB: 9 more months with €30bn purchases
- US GDP grew 3% in 3Q thanks to investment
- Neutral bund stance, long bias in T-note
- S&P upgrades Italy, spreads rally below 150bps

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ECB to opt for 9-month QE extension


- Pullback in rates to 0.40% on Bund
- ECB: 9-month extension of QE at €30bn monthly clip
- Neutral stance on T-note and Bund, caution on Gilts
- Neutrality warranted on Spain, Italy

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Catalonia risks contained so far


- Highs at 0.50% on Bunds, 2.40% on USTs
- US labor market conditions keep improving
- Neutrality in Bunds, ECB to remain cautious in 2018
- Limited contagion of Catalonia events

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Euro area growth vs. Catalonia political risk


- Steeper yield curves
- Catalonia vote revives European political risk
- Spanish spreads under widening pressure
- Neutrality recommended in bond markets

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Fed policy at an inflexion point


- Fed decision fully in line with expectations
- Curve flattening in US, hike likely in December
- Brexit: May facing harsh reality
- Slight short bias in Bunds, prefer USTs

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Yellen quits painting


- Yields rebound: Bund about 0.45%
- Fed to kickstart balance sheet reduction this week
- Strong spread narrowing in Portugal following S&P rating upgrade

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Draghi keeps markets waiting


- ECB cuts 2019 inflation forecast
- QE likely to be amended next month
- Bund yields oscillating about 0.35%, T-note near 2.10%
- Sovereign debt spreads nearly unmoved after ECB meeting

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The ECB’s communication challenge


- Absence of volatility across markets despite multiple risks
- Strong growth in the US (3%qoqa)
- ECB : tapering announcement in October
- Neutral duration stance remains recommended
- Italian 10-year spread below 170bp threshold

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US government shutdown risk redux


- Draghi, Yellen avoid making near-term policy guidance
- Shutdown risk prevails across markets
- High uncertainty regarding tax reform

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Yields down ahead of Jackson Hole event


- Bond yields down about 10bps month-to-date

- Yellen, Draghi awaited in Jackson Hole

- Neutral duration positioning, hold exposure in sovereign space

- Slight underperformance of euro credit vs. Bunds

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Draghi waits for Autumn


- Ambiguous Draghi waits for Autumn
- FOMC will hint at start of normalization in statement this week
- Neutral stance on rates in euro and US, short Gilt bias
- Sharp tightening in Italian and Spanish spreads

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Easing yields benefit risk asset markets


- Yellen’s address before Congress unsurprising
- Note yields easing towards 2.30%
- ECB to postpone policy adjustment to September

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The Central bankers’ bond sell-off


- Global bond market rout extends: Bunds about 0.55%
- Steady growth in the US
- Fed’s Yellen will address congress for semi-annual report
- Neutral duration stance, flattening bias in 10s30s

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Central Banks talk yields higher


- ECB: QE tapering likely in early 2018
- Increased tolerance for oil-led inflation slowdown
- BoE: cyclical capital buffer increased, possible hike this year
- Slight long Bund exposure, neutral stance on USTs

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Flattening pressure persists


- Euro area: strong growth but slower inflation in June
- Long Bund positioning, expect tensions on swap spreads around half-year close
- Rally in credit, rich valuations in high yield

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Fed will begin balance sheet reduction


- Fed raised interest rates to 1.25%
- Balance sheet reduction to start in October
- Neutral on rates, flattening pressure continues

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Fedspeak more important than rate hikes


- Draghi lowers inflation forecasts to 1.3% next year
- Fed likely to hike rates this week
- Neutral on rates before Fed meeting
- Tighter sovereign spreads, stability in credit spreads

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ECB forward guidance to be amended


- US: employment growth slows on shortfall of skilled workforce
- US jobless rate down to 4.3%
- Draghi to amend rate guidance

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US growth revised up


- US growth revised to 1.2%qoq in 1Q17
- Investment driving US growth
- Risk of early elections rise again in Italy

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Trump, Temer towards impeachment?


- Rally in T-notes, risk of impeachment of Trump
- Tensions in US housing markets
- Neutral stance in US duration, short Bunds
- Italy, Portugal spreads narrow

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Credit outperformance continues


-  US inflation moderates to 2.2%, T-note yields down to 2.33%
- BoE opts for status quo despite above-target inflation until 2020
- Keep a long bias on T-notes, sell Bunds
- Euro credit spreads narrowing further

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Fed likely to raise rates in June


- Higher yields on 10-year Treasuries (2.40%) and Bunds (0.44%)
- The decline in unemployment rate justifies raising rates in June
- Euro sovereign spread tightening

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Stable yields in Treasury markets before FOMC


- Modest growth in the US in 1Q17 (0.7%qoqa)
- Zone euro: inflation en hausse en avril (1.9%A)
- Euro area inflation on the rise in April (1.9%yoy)

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Relief rally in Sovereign spreads


- Risk asset rally after round 1 in French elections
- Shutdown risk in the US
- US GDP growth likely to soften in 1Q17
- Sell Bunds, overweight France, Spain
- Stability in credit spreads, tighter spreads in high yield and covered bond space

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Bonds rally on heightened geopolitical tensions


- Unpredictable Trump policy, a new risk for markets
- Rally in bonds and yen in response to heightened political tensions
- Neutral stance recommended in Bunds, T-notes
- Investors left waiting for French elections outcome

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A little pause


- Fedspeak to be market mover yet again
- US labor market data somewhat inconsistent
- Hold long US rate bias
- Higher volatility in OAT markets ahead of elections

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US yields lower on failed Obamacare repeal


- Healthcare reform fails in the US, T-note yields dip below 2.40%
- Success at last TLTRO in euro area
- Raise exposure to T-note, neutral on Bunds

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Fed maintains gradualism


- Fed projects three hikes in 2017
- Growth momentum intact in Europe, US
- German 2-year yields back above -0.80%
- Neutral on rates, hold 10s30s steepeners

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Schatz squeezed further


- Schatz hit historical lows at -1%
- Fed unsure about timing, not direction of rates
- Sell T-Note, neutral on Bunds
- Lighten OAT holdings, keep out of BTPs

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Yields capped by political uncertainties


- US credit quality deteriorating in spite of growth

- Fed: hike possible in March?

- Neutral on Bunds, long exposure on USTs

- High volatility in OAT spreads

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Fed faced with fiscal and political uncertainties


- Yellen’s testimony to guide bond markets
-  Fed’s Tarullo resigns
- Hold neutral stance in USTs, long bias in Bunds
- Upward pressure on Italian and French spreads

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BTPs exposed to downgrade risk


- T-note does not react to strong data
- Fed opts for status quo, cites low inflation expectations
- Raise US duration exposure
- Italian spreads skyrockets to 200bps

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Sovereign spreads under pressure (again)


- Moderate growth in the US (1.9%qoqa in 4Q16)
- FOMC: status quo expected
- BoE: end of Gilt purchases as inflation expectations soar
- Sovereign debt: cut exposure to Italy and France

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Higher volatility in US, euro bond markets


- ECB: purchases below deposit rate in PSPP only
- US GDP growth to hover about 2.5% in 4Q16
- Keep a short bias on USTs and Gilts
- France: inaugural syndication of Green OAT

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