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22 Apr 2016
Eurozone: Peculiar market response to Draghi / TLTRO take-up - ING
Martin van Vliet, Senior Rates Strategist at ING, suggests that the introductory statement to yesterday’s ECB press conference didn’t contain many surprises, but President Draghi still managed to excite markets during the Q&A session.
Key Quotes
“He left the door open to further rate cuts by reaffirming that the GC expects ECB rates to ”remain at present or lower levels ... well past the horizon of our net asset purchases, which are still intended to run until the end of March 2017, “or beyond, if necessary”. Nonetheless, by striking a more cautious tone on the concept of helicopter money, which was no longer deemed “very interesting” but “fraught with operational, legal and institutional difficulties”, he dampened market hopes of any such extreme measure.
This, coupled with a more hopeful tone on the recovery of inflation, led to a jump in 10-year Bund yields, which closed 8.5bp higher at a one-month high of 0.24%. Five-year yields also nudged higher, albeit by ‘only’ 5bp. EONIA forwards now put the probability of a further 10bp depo cut before year-end at only 40%. Interestingly, despite the sell-off in 10yr Bunds, 5y*5y inflation remained stubbornly unchanged at 1.40%. The other oddity was that 10yr peripheral spreads tightened by 1-2bp, despite the remark by ECB Vice President Constancio that there is reason to change the present system of zero risk weights for sovereign debt.
All in all, the focus clearly is on the implementation of the measures announced in March, which suggest that the ECB has adopted a wait and see approach before contemplating further easing measures. Indeed, it first wants to assess the functioning of the CSPP, which will begin in June, and the take-up of the first new TLTRO due also that month.
We estimate a take-up of around €500bn, with around 70% of demand coming from the periphery. Based on this we expect 5yr BTP/Bono spreads over Bunds (currently at around 70bp) to drop back to the 55-60bp area later this year, but probably not as soon as June given the vote on Brexit.”
Key Quotes
“He left the door open to further rate cuts by reaffirming that the GC expects ECB rates to ”remain at present or lower levels ... well past the horizon of our net asset purchases, which are still intended to run until the end of March 2017, “or beyond, if necessary”. Nonetheless, by striking a more cautious tone on the concept of helicopter money, which was no longer deemed “very interesting” but “fraught with operational, legal and institutional difficulties”, he dampened market hopes of any such extreme measure.
This, coupled with a more hopeful tone on the recovery of inflation, led to a jump in 10-year Bund yields, which closed 8.5bp higher at a one-month high of 0.24%. Five-year yields also nudged higher, albeit by ‘only’ 5bp. EONIA forwards now put the probability of a further 10bp depo cut before year-end at only 40%. Interestingly, despite the sell-off in 10yr Bunds, 5y*5y inflation remained stubbornly unchanged at 1.40%. The other oddity was that 10yr peripheral spreads tightened by 1-2bp, despite the remark by ECB Vice President Constancio that there is reason to change the present system of zero risk weights for sovereign debt.
All in all, the focus clearly is on the implementation of the measures announced in March, which suggest that the ECB has adopted a wait and see approach before contemplating further easing measures. Indeed, it first wants to assess the functioning of the CSPP, which will begin in June, and the take-up of the first new TLTRO due also that month.
We estimate a take-up of around €500bn, with around 70% of demand coming from the periphery. Based on this we expect 5yr BTP/Bono spreads over Bunds (currently at around 70bp) to drop back to the 55-60bp area later this year, but probably not as soon as June given the vote on Brexit.”