Last week we noted that the ECB’s decision to effectively put a floor under EMU sovereign spreads by restricting PSPP asset purchases to paper with yields above the deposit rate would likely have the effect of flattening the German bund curve [2] as yields across maturities converge on -0.20:
In sum, yields on shorter-dated German paper will move up to the deposit facility threshold and with the 10-year yield sitting below 40bps, it won’t be long before the entire curve flattens at -0.20bps.
Two days into ECB asset purchases and we’re fast approaching a flat curve. From Bloomberg:
- GERMAN 2/30Y YIELD SPREAD BELOW 100 BPS, 1ST TIME SINCE 2008
- GERMAN 30-YEAR BUND YIELD DROPS BELOW 0.75% FOR FIRST TIME
- 10Y yield hits record low of 0.246% as benchmark 2Y, 5Y and 30Y yields also hit all-time troughs with curve bull-flattening
- 10/30 drops as much as 7bps to 51bps, flattest since 2012
...and as Citi notes, we may begin to see a similar scenario play out in other core countries’ debt...
The fact NCBs will not buy below -20bp (and may show caution at negative rates near -20bp) leaves open the room for spread compression to -20bp by front/intermediate core and semi-core paper.
... and here's a visual:
[3]
