ECB: Extension of QE programme likely to put downside pressure on euro area yields - Nomura

Research Team at Nomura, expects the ECB to extend its QE programme by another six months, without reducing the pace of monthly purchases.

Key Quotes

“The extension is likely to put downside pressure on euro area yields and peripheral spreads, while risk sentiment is likely to be supported somewhat too. A decision to purchase more peripheral bonds would accelerate euro area investors’ foreign bond investment by improving risk sentiment. If we assume a 10bp decline in euro area yields and 0.5 standard deviations of risk-on movement (higher equity prices, lower volatility, and narrower peripheral spreads) occur, foreign bond investment by euro area investors could increase by nearly EUR10bn per month from end-October (including the Trump effect).”

 “In contrast, an immediate tapering decision or a step toward tapering (not our central case scenario) could slow euro area investors’ foreign bond investment. A tapering announcement would likely widen peripheral spreads and hurt risk sentiment. Higher euro area yields would also weaken foreign bond investment.”