Friday marked an important milestone for EU bond markets: the first spoof ECB QE taper Twitter feed was born and the taper date “unveiled”...
07/10/2015— ECB taper (@Ecbtaper) April 9, 2015
Although this information didn’t come to light until Friday, we suspect that even had it been available on Thursday, SocGen would likely be sticking with their contention that PSPP taper calls are more than a little premature.
Citing the coming EGB supply shortage, still subdued inflation expectations, and the fact that Mario Draghi is pot committed by the central bank’s verbosity on its commitment to the program, the bank outlines the case against the taper talk and also highlights the eurozone’s accelerating plunge into NIRP-dom.
We still believe this rally in Europe has more to run, even as ever more bonds push into negative territory. The ECB still has 93% of its projected QE programme left to accomplish. While this is partially anticipated, it is hard to quite integrate the drought in bond supply this summer. In the face of relentless demand, that summer drought will set the scene for another leg lower in yields.
Holders of EGB short positions are likely to find carry a killer. Sure the positive momentum in the EA economy has stronger foundations than a year ago. But with ECB buying set to remain the overwhelming force into summer, better economic news will not threaten EGBs.
That said, there are already comments that the ECB is likely to shy away from PSPP once growth reappears. Indeed, some are already thinking ahead to when tapering will start. But we see such talk as far too premature. We would need to see a marked improvement in inflation expectations before the market will start thinking in earnest that the ECB will need to reconsider QE. Even then, the ECB would find it tough to circumvent Mr Draghi’s solid pledge to execute PSPP in full (if not even to accelerate it, should economic conditions fail to improve much). And we would need to see another big push lower in yields over the summer before the ECB would widen the buyable universe of bonds (not that buying more agencies or corporates is going to ease the squeeze much) or raise the 25% cap on each bond bought.
Put simply: subdued summer issuance means the ECB bid will likely be enough to counter any upward pressure on yields that may come with better economic news. Meanwhile, the insanity continues as falling bund yields are making it increasingly less likely that the Bundesbank can hit its purchase targets and yields on debt issued by bailed-out Portugal go negative:
Long-dated, core EGB purchases by the Eurosystem were modest in the first month of the PSPP. We see the Bundesbank as having to buy 25% of each and every Bund to meet its capital key. So purchases could intensify on those long, hard-to-buy Bunds, if the Buba is serious about meeting its capital key. Against this backdrop, we expect 25y Bund to catch up with swaps over the coming weeks
While the Fed and Treasuries are marking time, this week has seen yet another fresh record low for the 10-year Bund. Meanwhile, other core EGB bonds such as DSLs and RFGBs in the 2017-2018 area are falling below the -20bp level in yield for the first time (so not even the ECB will buy them). Switzerland even tapped the 1.5% 2025 at -5.5bp, with the issue finishing the week at -10bp (though still 20bp cheaper than the lows in January). Even BB Portugal is no longer a refuge with yields pushing negative in the 1-2-year area.
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The only remaining question is whether a shortage of purchase-eligible bonds leads to a "forced" taper when raising issuance caps and expanding SSA purchases fails to fill the gap.