Summary
€-SSA
€-SSA spreads near term outlook: turn neutral €-SSAs vs. swaps but maintain a bullish bias on €-SSAs vs. Germany (slide 3)
Trading theme 1: take profit on OW 10Y ESM vs. Germany; preference for OW 3-5Y sector, especially in ESM, in the near term on carry
considerations (slide 4)
Trading themes 2: stay OW German regional bonds vs. federal bonds in 8-20Y maturities; hold long 10Y NRW vs. Germany (slide 5)
Trading theme 3: hold 10s/30s EFSF flattener vs. Germany on valuations and limited supply pressures (slide 6)
Trading theme 4: stay OW KfWvs. Finnish and Dutch agencies as PSPP demand fades for smaller core agencies; hold UW 4-7Y FINNVE vs. KfW
(slide 7)
Trading theme 5: Spanish regional bonds at 15bp+ pick up over sovereign bonds are attractive (slide 8)
Supply: as expected €-SSAs have been heavy issuers YTD with lower 10Y+; lower gross €-supply in 2019 vs. 2018 (slides 13-14)
ECB QE:we expect a monthly reinvestment pace of €1bn-2bn for the rest of 2019 (slides 15-16)
$-SSA
$-SSA spreads outlook: while the balance of risks points to range bound spreads across $-SSA issuers, the spread pickup over US Agencies
remains subdued near the narrow end of its 2-year range (slide 21)
Trading themes: stay neutral on $-SSAs vs. US Agencies.Continue to favorKfWdebt over EIB.We no longer recommend extending from 3Y to 5Y
year EIB debt (slides 22-23)
Supply: we make modest revisions to our supply forecast, and now look for $92bn in gross issuance of benchmark $-SSA debt over 2019, $3bn lower
than we previously anticipated (slide 24)
-SSA
-SSA spreads outlook: -SSA 10Y ASW remain cheap historically vs. 10Y gilt ASW but we have a neutral view over the short term (slide 28)
Trading theme 1: close long EIB 1.125% Sep21 vs. gilt 3T21 (slide 29)
Trading theme 2: 13Y EIB cheap vs. KfW, go long EIB 5.625% Jun32 vs. selling 9.77mn KfW5.75% Jun32 (slide 30)
€-SSA market update2
€-SSA market flow update12
$-SSA market update20
All exhibits shown in the presentation are sourced from J.P. Morgan unless otherwise stated
-SSA market update25
Appendix36
10Y €-SSAs are now trading marginally dear vs. swaps
J.P. Morgan €-SSA fair value model statistics; 2012 -current
Core wtd
(ex DEM)
ASW
Gross
PSPP
flow (3M
MA) *
Italy
political
risk
EFSF1.14-0.310.08-4.08.191%-3
EIB0.97-0.920.07-8.76.594%-2
ESM**0.72-0.220.06-12.25.179%-1
EU0.81-1.180.05-13.36.692%0
KfW0.34-3.070.02-14.34.286%-1
NRW0.43-2.350.01-1.44.590%2
Beta
Intercept
Std. error
(bp)
R-
squared
(%)
Residual
(bp)
€-SSA spreads near term outlook: turn neutral €-SSAs vs. swaps
but maintain a bullish bias on €-SSAs vs. Germany
We forecast 10Y €-SSAs to outperform vs.
swaps and vs. Germany in 2H19
J.P. Morgan forecast of 10Y €-SSA spreads; bp
Since our last SSA outlook in mid-January, €-SSAs have outperformed vs. swaps (1-5bp) and
especially vs. Germany (1-7bp). The €-SSAs outperformed despite widening of core sovereign
spread vs. swaps and Germany (see slide 10).
€-SSA spread medium-term outlook:tightening bias vs. swaps and especially vs. Germany in
2H19 on tighter core spreads, narrower German swap spread and reduced Italy uncertainty
€-SSA spread near term outlook: after strong outperformance over the past month, we find €-
SSAs marginally dear vs. swaps and vs. core sovereigns. We, therefore, take some risk off the
table and turn neutral €-SSAs vs. swaps but maintain a bullish bias on €-SSAs vs. Germany
Drivers of our €-SSA outlook:
Valuations: current 10Y spread vs. swaps are 3-5bp dear based on our fair value framework
Supply: lower gross €-supply in 2019 vs. 2018 mainly due to lower EIB, ESM & EFSF
supply; we expect lower 10Y+ supply compared to QE period
QE: despite the end of net QE, supply vs. QE dynamics in 2019 will deteriorate only
marginally vs. 2018 due to lower supply and increasing PSPP redemptions (see slide 15)
Idiosyncratic factors: Italy to remain a key driver in the near term, with our expectation of
10Y Italy-Germany to range trade at 250-300bp, Brexit remains the main wild card for €-SSA
markets for 2019; we do not expect material impact on EIB due to UK withdrawal
* ASW = bond yield ¨Cmaturity matched swap yield.
Note: Forecast vs. Germany calculated as forecast vs. swaps ¨CGerman swap
spread forecast.
Source: J.P. Morgan
* Gross PSPP flow defined as
net PSPP flow + PSPP
reinvestments.
** For ESM analysis starts in
November 2013.
Note: all explanatory variables
are statistically significant. See
2019 €-SSA outlook for details
onJ.P. Morgan €-SSA fair
value model.
Source: J.P. Morgan
19-Feb1Q192Q193Q194Q19
EFSF-7-6-7-9-11
EIB-10-9-10-12-14
ESM-9-9-10-14-15
EU-11-14-14-18-19
KfW-17-17-17-19-19
NRW-5-9-9-10-11
EFSF4748433937
EIB4545403634
ESM4645403433
EU4440363029
KfW3837332929
NRW5045413837
Memo:
Core wtd. ASW ex Germany-14-18-18-21-22
Core wtd. ASW to Germany4136322726
10Y German b/m ASW-55-54-50-48-48
10Y Italy-Germany270260250225215
Gross PSPP flow supras1.61.61.61.61.6
Gross PSPP flow German agencies0.60.60.60.60.6
Gross PSPP flow German regions0.80.80.80.80.8
vs. Germany
vs. swaps¡£