HALISTER1: ECB QE Taper Can Be Bullish for Bunds and Here’s Why: Citi

ECB QE Taper Can Be Bullish for Bunds and Here’s Why: Citi

(Bloomberg) -- ECB is set to end QE purchases in 2018 despite the market already telling us that higher inflation isn’t sustainable, which implies QE taper locks in lowflation just as Fed hikes do the same in the U.S., Citigroup strategists including Jamie Searle write in a client note.
  • These inflation dynamics could easily dominate valuations, and therefore the end of QE purchases may turn out to be bullish for bunds, surprising the bearish consensus
  • Flash estimate for HICP in May is likely to see some reversal of the Easter-related distortions; headline can fall back to 1.5%, core to 1.0%
    • Market still believes that headline inflation will fall back to 1%-1.5% range and stay there for the next few years, which is inconsistent with a sustainable return to the inflation target
  • Expect 10y bunds to average around 35-40bps for the rest of this year and into early-2018, despite looming ECB taper; this is well below consensus which looks for 0.75% by year-end, 1% in 2018
To contact the reporter on this story: Stephen Spratt in London at sspratt3@bloomberg.net

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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2539Z GR (European Central Bank)

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Jamie Searle (Citigroup Inc)

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