SSA bond markets: ECB’s taper talks gathering momentum? - Rabobank

The analysis team at Rabobank explains that even though ECB President Mario Draghi has so far refused to admit that the ECB has discussed or is preparing to discuss tapering its QE programme, the market fully expects such intention to be signalled in the near term, perhaps as early as June.

Key Quotes

“Latest release of the latest Financial Stability Review has drawn further attention to the ECB’s insights as regards the possible impact that the QE programme has had on European government and SSA bond markets. Specifically, the report suggests that “repricing risks in fixed income markets remain significant" and that "continued political uncertainty and potentially higher bond yields could trigger renewed debt sustainability concerns".

“We believe Spanish, Italian and German debt looks to be subject to a notable “QE premium”. Our analysis suggests that the premium applied to core and peripheral countries does not imply that both core and peripheral yields will widen as tapering is priced in. Instead our expectation of a notable widening of peripheral spreads argues in favour of safe haven flow into core markets offsetting declining demand from the ECB. We also noted in this piece that applying a bearish read across to core markets from US tapering is likely very wide of the mark as there is a credit element to ECB QE that was absent from the US. The fact that Germany has proportionally benefited more than most markets from QE only adds to this bullish view as proportionally fewer German bonds will be available for investors to buy in a risk-off move.”  

“As such, we anticipate that the safe haven bid will flow not just into Bunds but across the German, Dutch and Finnish agency markets in particular which in turn suggests yields on KfW, NRW Bank and Rentenbank in Germany and BNG and Nedwater in the Netherlands are unlikely to rise sharply. Supranational debt should also benefit from these flows, with issuers such as the EIB, EFSF and ESM already in strong demand on account of the risk shared nature of these issuers.”