Back in April, BofA analyst Barnaby Martin suggested that in order to mitigate the potential fallout from the end of the ECB's QE, the European Central Bank could engage in an "Operation Twist" to flatten the curve and keep term premiums low, or in other words, to avoid chaos for the European bond market.
BofA: "Our economists have recently talked about the possibility of an “Operation Twist” to the ECB asset portfolio, to help keep term premiums low."— zerohedge (@zerohedge) April 13, 2018
As MNI details, the ECB may stick to current capital-key shares rather than aligning QE portfolio with new shares as capital key is due for rebalancing. It also notes that a "Fed-style" Operation Twist is not being evaluated, but there could be less rigid restrictions placed on what kind of bonds to be re-purchased.
What is more notable is that according to the report, ECB officials are turning increasingly bearish and see downside risks as mounting, including trade headwinds, a potential slowdown in emerging economies, Brexit and Italy’s growing budget deficit. That this is coming with less than 3 months left under the ECB's QE mandate is especially troubling.
To address this, the ECB's enhanced guidance should give an indication of ECB thinking as to how it could respond to events over a one to two-year horizon, MNI notes.
In kneejerk response to the MNI report, bund futures promptly trimmed declines, with the 10Y yield dropping to session lows below 0.51%, while Germany 5s30s curve flattened 2bps to the narrowest in almost 2 years.
The news also helped the euro hold above a key pivot area, with the EURUSD matching earlier gains in the pound after European Council President Donald Tusk said the EU is serious about getting a Brexit deal, though he rebuked U.K. Foreign Secretary Jeremy Hunt for likening the EU to the Soviet Union.
Whether this renewed attempt to flatten the yield curve and push long-dated yields lower will succeed will ultimately depend on what happens with US Treasurys, where - for now at least - the furious selloff of the past 24 hours appears to have stabilized for the time being.