ECB in control of sovereign credit spreads

Core bonds rose in lockstep with equities yesterday. A vibrating US session followed a hesitant European start. Main European benchmarks ended up to 2.5% higher while US stock markets eked out 6% gains. German Bunds eventually significantly outperformed US Treasuries. The latter suffered a late setback, supposedly because of liquidity issues with a large block trade at the very end of the curve. German yields declined by 4.2 bps (30-yr) to 10 bps (10-yr) with the belly of the curve outperforming the wings. Changes on the US yield curve ranged between -3.6 bps (2-yr) and +0.1 bp (5-yr). 10-yr yield spread changes vs Germany narrowed by 5 bps for core countries, 10 bps for Belgium/France, around 20 bps for Spain, Italy and Portugal and 60 bps for Greece. The huge rally followed the publication of legal documents that the ECB will be scrapping its issuer limit, i.e. the amount of bonds it can buy from each sovereign. Up until now, that limit stood at 1/3rd of outstanding debt eligible for purchases. To fully employ the new bazooka (€750bn additional QE), the ECB had no option but to scrap those limits. Together with the possibility of using its OMT-programme (unlimited bond purchases of a sovereign) if EU leaders agree on using the ESM to provide credit lines to applying member states, it means that the ECB will be de facto in control of credit spreads on EMU sovereign states.

Asian stock markets gain around 1% this morning with Japan (+4%) outperforming. The fact that the US overtakes China for most confirmed coronavirus cases, grabs all headlines. EU leaders concluded a teleconference indecisive. In a joint statement, they grant the Eurogroup (ministers of Finance) two weeks' time to come up with proposals to tackle the socio-economic consequences of the virus outbreak. There's no specific reference to using the ESM or jointly issuing coronabonds. One step forward, two steps back, it seems. Core bonds are positively oriented. Today's eco calendar contains only second tier eco data. End-of-quarter buying typically supports core bonds. We continue to closely monitor the resilience of stock markets. With (US) fiscal and monetary policy fully employed, it's over to the economy. As the virus spread continues accelerating, lockdown measures risk being prolonged, with all due consequence. From a technical point of view, the German 10-yr yield tested the upper band of the trading band since last Summer. A break didn't occur with a new ST equilibrium between -0.43% and -0.15%. The US 10-yr yield trades volatile, but still below the previous all-time low (2016), which is first resistance. For US yields, the Fed's unlimited QE announcement is the de facto start of curve control. That implies that the mid-March Treasury sell-off in times of stress is less likely to see a repeat.

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