Eurozone: Rates strategy spark – ING

With many investors still sidelined ahead of Thursday’s ECB meeting, futures led core yields lower yesterday, with the 10yr Bund giving back 2bp of Friday’s 6bp sell-off, notes the analysis team at ING.

Key Quotes

“10yr peripheral spreads were 2bp tighter, while Belgium performed out of the auctions to lead the modest tightening seen in semi-core space. 30yr OLOs were 1bp tighter on the day.”

“Many pundits hold a bearish bias on rates and spreads going into the ECB meeting, suggesting it doesn’t take much for Draghi to trigger a risk-on rally. However, our understanding is that many real money accounts are already positioned for a dovish ECB taper announcement. In our view, the market’s response will be mainly shaped by how credible the ECB is in signalling they could extend QE further, if necessary. That is why we believe Draghi’s comments on the issuer/issue share limits are crucial, although we acknowledge that important technical details may not be forthcoming until later this year.”

“In terms of today’s events, the Italian Senate will start discussing the electoral law reform, with the aim of having a final vote on the Rosatellum by Thursday. On the datafront, flash PMI data and ECB bank lending survey should reveal whether the recent strong economic momentum in the Eurozone has been sustained.”

“The ECB QE data for the week ended 20 October, released yesterday, saw a PSPP stock increase of €10.8bn, down from €12.5bn in the previous week. Last week, however, the net purchase pace might have again been dampened by larger bond market redemptions from Italy, Portugal and Ireland totalling €26bn. Today’s ECB Financial Statement should reveal whether the gross purchase pace indeed held up better.”