ECB survey highlights side-effects QE

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ECB survey highlights side-effects QE

Global core bonds lost some ground yesterday, working off overbought conditions. German Bunds underperformed European swap rates and US Treasuries at the front end of the curve. This Schatz/Bobl specific move occurred after the release of an ECB survey which cited scarcity of high‐quality short term debt, which is used as collateral in funding markets. So far, the ECB continuously stated that money markets were properly functioning. This survey for the first time highlights side‐effects from the asset purchase programme. The front end of the German curve suffered after the release. The only eco item on the agenda was the final EMU CPI, confirmed at 1.5% Y/Y and ignored by investors. Risk sentiment on stock markets deteriorated during the US session, but losses remained limited and couldn't prevent US Treasury losses. Brent crude crashed during US dealings on higher inventories ($55/barrel to $52.5/barrel). ECB Hansson said that the discussion on the QE exit should start soon, allowing a good preparation, even if the ECB should not rush into concrete action. ECB Coeure said the ECB is very, very serious about forward guidance. Risks for the outlook are balanced. ECB Praet still sees downside risks. The survey and ECB comments suggest that the QE exit discussion will start in the next few months. The US Beige Book was somewhat mixed, but the tone was positive on balance, suggesting modest‐to‐moderate expansion.

In a daily perspective, the German yield curve bear flattened with yields 4 bps (30‐yr) to 6.2 bps (5‐yr) higher. Changes on the US yield curve ranged between +1.6 bps (2‐yr) and +4.6 bps (10‐yr). On intra‐EMU bond markets, 10‐yr yield spreads versus Germany narrowed 3 to 9 bps for the non‐core countries. Core spreads declined by 1 to 3 bps.

Slightly more interesting eco calendar

Today, market attention will go to the EMU consumer sentiment and the Philly Fed business outlook, both for April. Less important are the initial claims. US sentiment data sky‐rocketed after Trump's election. The latest NFIB small business and the Michigan consumer sentiment survey showed that sentiment held close to record highs. However, NY business sentiment plunged in April, suggesting that firms might get second thoughts about Trump's ability to deliver on tax cuts and infrastructure spending. The Philly Fed business sentiment fell already in March, but is still at very high level (32.8). A slowing to 25.5 is expected in April. A sharper decline won't go unnoticed. EMU consumer confidence is expected to be marginally stronger at ‐4.8 (from ‐5), a high level for this indicator. The market reaction to the latter is often very modest.

Spain and France tap market

The French treasury taps the on the run 3‐yr BTAN (0% Feb2020) and 5‐yr BTAN (0% May2022) for a combined €4.5‐5.5B. The bonds cheapened in ASW spread terms going into the auction and ahead of the French elections. That event risk could hamper demand, even if the amount on offer is relatively low for French standards. Additionally, the French Treasury sells three inflation‐linked bond for a combined €0.75‐1.25B. The Spanish debt agency taps the on the run 5‐yr Bono (0.4% Apr2022), 10‐yr Obligacion (1.5% Apr2027), 30‐yr Obligacion (2.9% Oct2046) and off the run Obligacion (6% Jan2029) for a combined €4.5‐5.5B. The bonds also cheapened in the run‐up to the taps. The off the run bond (Jan2029) trades cheap on the Spanish curve, while the on the runs are a tad expensive. We expect plain vanilla demand.

Little downside Bund ahead of French elections

Overnight, Asian risk sentiment improved with gains of up to 0.5%. The US Note future and Brent crude stabilise, suggesting a neutral opening for the Bund. Today's eco calendar contains US weekly jobless claims, Philly Fed business outlook and EMU consumer confidence. Data aren't expected to inspire trading, but a weaker Philly Fed outlook could further question the reflation trade and marginally support US Treasuries. Last week's risk aversion pushed the US 5‐ and 10‐yr yield below key support levels (respectively 1.8% and 2.3%). The German 10‐yr yield lost 0.2% support earlier this week. Geopolitical concerns (North Korea & Syria), doubt about the implementation of Trump's pro‐growth agenda and French presidential elections (1st round on April 23) probably prevent return action (higher yields) this week as the eco calendar is irrelevant for trading apart from Friday's euro area PMI's. However, both the Bund and US Note future entered overbought conditions, suggesting that the core bond rally could lose some steam (eg. yesterday' trading). We expect consolidation around current levels.

Our medium term strategy remains that US yields will recapture lost support levels and afterwards turn higher in the old trading bands as the Fed prepares another rate hike in June and will run‐off its balance sheet before the end of the year.

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