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5 Jan 2016
Euro government bonds: Seasonality gaining traction, but supply dynamics still key - BofAML
FXStreet (Delhi) – Research Team at BofAML, suggests that seasonal analysis has been gaining considerable traction over the recent years when it comes to Euro government bonds.
Key Quotes
“The main question is why these seasonals persist and whether they will continue into the future. In this context, we take an in-depth look at rapidly changing Euro govie supply dynamics, which are key in identifying trends and opportunities, not only for Q1 but for the rest of 2016.
• We favour 2y Spain (current: 0.093%) given the much more favourable supply outlook in Spain compared with Italy in Q1. Risk could arise from a heightened political concern.
• We like 3y Nether (current: -0.277%), with issuance in this part of the curve falling to zero next year, a sizable deviation from 2014 and 2015. Better economic data and/or a weaker expectation of ECB easing are potential risks.
• Swap spreads should be supported by German net issuance totaling -€37bn in Q1 next year, over €35bn lower than the long-run average, with Q1 net supply having predicted the direction of swap spreads in seven of the past eight years.
• With a number of core countries increasing bill issuances next year, we continue to favour Belgian and French bills vs both core and OIS.”
Key Quotes
“The main question is why these seasonals persist and whether they will continue into the future. In this context, we take an in-depth look at rapidly changing Euro govie supply dynamics, which are key in identifying trends and opportunities, not only for Q1 but for the rest of 2016.
• We favour 2y Spain (current: 0.093%) given the much more favourable supply outlook in Spain compared with Italy in Q1. Risk could arise from a heightened political concern.
• We like 3y Nether (current: -0.277%), with issuance in this part of the curve falling to zero next year, a sizable deviation from 2014 and 2015. Better economic data and/or a weaker expectation of ECB easing are potential risks.
• Swap spreads should be supported by German net issuance totaling -€37bn in Q1 next year, over €35bn lower than the long-run average, with Q1 net supply having predicted the direction of swap spreads in seven of the past eight years.
• With a number of core countries increasing bill issuances next year, we continue to favour Belgian and French bills vs both core and OIS.”