Eurozone Rates: Breaking up is hard to do - ING

Instant spread widening, delayed flight to safety as bunds opened lower after US Treasuries slumped in the night, but in the course of yesterday a flight to safety bid ensued on the back of the escalating political crisis in Spain, notes the analysis team at ING.

Key Quotes

“Eventually, 10yr Bund yields closed only 1bp lower after solid US ISM data dragged USTs lower. German 10s30s were little changed, while German ASW spreads widened by around 1-1.5bp.”

“As could be expected, peripheral spreads came under sharp widening pressure, with SPGBs underperforming Germany – which celebrates its reunification today – by around 9-10bp in the 7-30yr area, while cheapening some 4-5bp versus BTPs, and slightly less in the short-end. Interestingly, 5s10s in BTPs steepened a further 1bp to reach fresh 3- year highs. French and Belgian spreads were only modestly wider (some 0.5bp in the 10yr area), as Ireland clearly underperformed, especially in the 5yr area on the back of the supply announcement.”

“ECB QE. Due to the balance sheet reporting schedule of the National Central Banks, the weekly and monthly APP information releases will occur today at 15:45 CET – one day later than usual. We will be closely scrutinizing the data to see whether overbuying (relative to the capital-key) continued in Italy and France. Interestingly, in a speech in London ECB Chief Economist Peter Praet yesterday signalled that rather than a 6-month extension at a constant monthly pace of €30-40bn the ECB may well opt for a 9-month (or even longer) QE-extension into 2018 at a slower pace.”

“EGB supply. No auctions are scheduled for today. But Ireland may come to the market to issue a new 5yr benchmark for €3-5bn via syndication (mandate announcement yesterday). The syndication is linked to the planned early repayment of loans from the IMF, Sweden and Denmark, and will help expand the universe of PSPP-eligible debt (hence avoiding a more pronounced capital key undershooting of Irish PSPP purchases).”

“Elsewhere, the Spanish Treasury yesterday set the volume targets for Thursday’s auction at €3.5-4.5bn for the nominals; the linker range is €0.25-0.75bn. The Italian Tesoro, meanwhile, announced a ‘concambio’ for Wednesday, offering the BTPS7.25 11/26.”