HALISTER1: Possible EGB Reactions to Various ECB Easing Scenarios: UBS

Possible EGB Reactions to Various ECB Easing Scenarios: UBS

(Bloomberg) -- Core European bond yields face upside risks in the near term, UBS strategists including Reinhard Cluse write in a client note.
  • Projected reactions to ECB
  • Increase in monthly purchases
    • Expansion of eligible assets
      • EU0b-10b: Core yields rise initially and peripheral spreads widen as the market is disappointed
      • EU10b+: Core yields to fall initially due to the “flow effect” from QE2; but, over the medium-term, core yields rise and peripheral spreads tighten as the “fundamental effect” of QE starts to be priced in
    • No expansion of eligible asset pool
      • EU0b-10b: Core yields rise initially, peripheral spreads widen as the market is disappointed
      • EU5b-10b: Muted initial reaction in core markets and peripheral spreads
      • EU10b+: Core yields to fall initially due to the “flow effect” from QE2 but yields to rise over the medium-term as the “fundamental effect” of QE starts to be priced in
  • Deposit rate cut
    • Cut
    • Splitting the deposit rate: Market should react to the weighted average rate by deposits and anticipate a declining EONIA rate over time
    • Cut > 12bp: Germany 2y moves to just below the deposit rate (if no rhetoric on possibility of more cuts); France 5y yields fall to below -25bp
  • Extending the horizon of asset purchases
    • 6-mo.+: Initial flattening of core curves but may steepen over the medium-term as 10-30y yields rise
    • 3-6-mo.: Limited impact in isolation as markets already expect this
  • Non-QE liquidity measures
    • New 3y+ TLTRO/LTRO: Limited market impact as take up likely to be low; liquidity is already high and money market fragmentation is not a concern
    • Extension of existing TLTRO program: no market impact
  • UBS expects the ECB to increase its monthly asset purchases by at least EU10b (from EU60b) on March 10 and cut the depo rate by 10bp from -0.3%, probably with a tiered structure
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Reinhard Cluse (UBS Global Asset Management Japan Ltd)

To de-activate this alert, click here

UUID: 7947283