Citi Assess The Lie Of The FI Land Post-ECB

Citi note that “the ECB offset its hawkish action of a 25bp hike with dovish words implying this is the peak. The market certainly believes this is the peak and will likely soon test rate cut pricing in 2024, which looks too timid vs. the new house view (of 100bp ECB cuts in 2024, beginning in June). With Bund yields still near YTD yield highs, there is bullish potential into year-end: we forecast 2.25% for 10yr Bunds.”

• “Our economists expect PEPP QT to be announced in October and start in Jan-24. Combined with slowing growth we slightly increase our bearish periphery spread bias and recommend 2s10s BTP steepeners vs Bunds as a positive carry proxy.”
• “Our turning neutral on swap spreads hasn’t been successful. Fundamentals are not under discussion, but the cheapening potential in term spreads is more controversial - we highlight vulnerabilities in excess liquidity distribution and holding structure of EA sovereign debt that may boost demand for safe-haven paper.”
• “The likely end of ECB hikes, and our bullish duration view, all else equal diminish the risk that real yield demand keeps pressuring breakevens higher. We see the balance of risks as sufficiently attractive to attempt shorts in 5y5y HICP swaps.”