Gloomy spring for global bond markets - BNPP

Eric Oynoyan, Research Analyst at BNP Paribas, notes that the February was characterised by a decline in bond market yields, with EGBs supported by the return of the risk off mode due to rising political uncertainty in the Eurozone and thinks that this situation will reverse in March.

Key Quotes

“In the US, comments from hawkish Fed members have increased the probability of an imminent Fed hike (we expect a hike in March instead of May and two other hikes in 2017). We think the next step will be a repricing of 2018 expectations towards four hikes. The significant short positioning of the speculative community will slow the rise in US 10y term premium (top chart), but it should still occur, pushing the US 10y yield towards the 3% handle. We recommend holding the 2y fwd 2s5s steepener and entering a short 2y swap spread.”

“In the UK, with the recent decline in gilt yields and the improvement in PMIs, the implied QE premium which fell to -10bp in October is now back to -55bp. This is unsustainable, in our view, and we expect a repricing to push up gilt yields and steepen the UK curve. We recommend keeping GBP 2s10s steepeners and expect a 25bp move.”

“In the Eurozone, the return of the risk off mode during the first three weeks of February due to French election uncertainty led to lower Bund yields, wider ASW and spreads. Last week’s developments in the French political landscape have, as we expected, triggered a reversal of EGB and ASW spreads dynamics. With stronger PMI data and rising headline inflation, we think the ECB will adopt a hawkish stance and prepare investors for a further tapering of its asset purchase programme in early 2018 and a rise in the depo by the year end. The impact of the March TLTRO should be limited to a richening of the 4y to 5y part of the curve (we trade this through our 2s5s10s receiving fly recommendation). We keep our short duration position initiated through the 10y Bono, a short German 30y ASW and are re-entering longs on cheap OATs through a long 5y versus Olo trade.”