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Citibank offered insights on the European Central Financial institution’s (ECB) potential financial coverage trajectory, suggesting that the dangers are tilted in direction of a extra extended cycle of rate of interest cuts. Opposite to present market expectations, which anticipate a 50 foundation level discount in January or March and an finish to the reducing cycle by mid-year, Citibank posits {that a} steadier cycle of 25 foundation level increments could also be extra doubtless.
Citibank’s evaluation factors to the mid-year interval when markets anticipate the ECB to pause, which coincides with the anticipated most impression from Trump-era tariffs. On this context, Citibank predicts that dovish policymakers could favor a decrease terminal fee over a faster tempo of fee reductions. Conversely, if hawkish voices immediate a pause, the rate-cutting cycle may resume later in response to persistent weak development, encouraging funding.
When it comes to bond markets, Citibank’s base case is mildly bullish on German Bunds in comparison with forwards and consensus. The financial institution targets a yield trough of round 1.85% for 10-year Bunds by mid-year, adopted by an increase to 1.95% within the fourth quarter of 2025. Citibank sees favorable risk-reward in sure futures positions and suggests tactical lengthy positions in 5-year inflation-linked swaps.
Concerning the € curve, Citibank’s terminal fee estimate stays 20 foundation factors extra dovish than market consensus after November’s rally. The financial institution doesn’t discover the risk-reward in 2-year to 5-year curve steepeners interesting and suggests a method that might profit from an out-steepening of the 10-year to 30-year phase versus the 5-year to 10-year phase, given a resilient macroeconomic surroundings.
For European authorities bonds (EGBs), Citibank forecasts a diffusion of 60-70 foundation factors between 10-year French OATs and German Bunds in a bullish situation, widening to 130-140 foundation factors in a bearish situation. The financial institution maintains a structural lengthy place on Spanish bonds versus French OATs and Belgian OLOs, and a tactical bearish stance on Italian BTPs. Citibank additionally favors a flattening place on the Spanish 10-year to 30-year curve versus French or Belgian bonds.
Within the UK, Citibank anticipates the potential of accelerated Financial institution of England (BoE) fee cuts later in 2025, setting a goal yield of three.35% for 10-year gilts by year-end. The financial institution recommends lengthy positions in 10-year gilts versus French OATs, sustaining brief positions in 10-year gilt asset swap spreads, and is monitoring brief positions in 5-year inflation-linked swaps.
Lastly, Citibank takes a barely bearish stance on € SSA and lined bond swap spreads going into 2025 because of excessive internet money necessities (NCRs), however expects efficiency enhancements within the first quarter of 2025. The financial institution advises shopping for 5-year KFW bonds versus Bunds and promoting positions in 2.5-year versus 4.5-year CADES. Citibank forecasts a provide of €1278 billion in EGBs for 2025, leading to an annual NCR (NYSE:VYX) of +€637 billion.
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