Citi: Pause For Thought

Citi write “as September begins, we review and reiterate our bullish duration view for Bunds into year-end (forecast 2.25% for 10s in 4Q23). This is indifferent to the upcoming ECB decision, although Schnabel’s apparent openness to a pause could accelerate the rally.”

• “Gilts could rally even more (forecast 3.95% for 10s in 4Q23), but the risk-reward favours steepeners, especially with signs of weaker demand for gilts.”
• “In € swap spreads, we acknowledge the asymmetric risks around our long-held tightening view and turn neutral ahead of a likely renewed focus on ECB’s balance sheet normalization.”
• “EGB spreads might remain range-bound for now thanks to a benign return of supply. However, periphery looks rich vs our models and might extend this richness if growth outlook continues to deteriorate. Further, demand backdrop might be turning into a headwind. Still, the key for EGB spread widening is likely to be any acceleration in ECB speak on QT. For the time being, we recommend tactical longs in 15yr IRISH vs Bonos and 20yr OATs vs OLOs.”
• “In € inflation, the OIS market is still pricing in cuts in 2025 despite a relatively elevated level of forward breakevens. Whilst those may partly reflect some premium, it feels something has to give, pointing towards some front-end real yield steepening.”