Halister News

(Bloomberg) -- Just days after Trump’s election prompted European rates markets to dump bets for more monetary easing, prices signal rising expectations ECB will relax the depo-rate floor on QE purchases to expand the pool of bonds it can buy.

• A slide in German short-dated yields has widened front-end swap spreads and bull-steepened the curve ahead of the Dec. 8 ECB meeting, even as Eonia pricing shows zero odds of the central bank cutting rates
  • That suggests the short-tenor rally is driven by factors specific to that part of the curve, possibly positioning for lower-yielding, near-dated bonds to become QE- eligible
• German 2-year yield fell 15bps in past two weeks, touching record lows; 2s10s curve bull-steepened 9bps in the period, as 10-year rates dropped only 7bps
  • However, the Schatz rally has also been supported by other factors such as a shortage of repo collateral
• 5-year yield has dropped back below the ECB depo rate, falling 11bps over past 7 sessions to -0.43%; 5s30s curve steepened 9bps in the period
• Yields on German bonds maturing up to and including July 2022 are below ECB’s deposit rate of -40bps, making them currently ineligible for purchases
• German bonds yielding below the ECB’s depo rate have shown significant outperformance vs swaps over the past 5 sessions
  • Since Nov. 18, 2-year invoice spreads have widened by 10bps to 58bps, touching highest levels since 2012; 5- year has widened 5bps to 53bps
    • Further out the curve, moves have been more muted, with 10y invoice spreads little changed, and 30y marginally tighter