10 Yr Bunds, Gilts and EFSF re opening pushing European Yields Higher

10yr Bund yields closed at the highest level in four months yesterday (i.e. 0.09%), and broke above the upper end of the -0.10%-0.05% trading range we identified for the coming weeks. Still, with the steepening pressure in EUR swap 10s30s remaining contained, we doubt whether the sell-off has further legs. Indeed, part of the sell-off seems Gilts-driven and due to a one-off reassessment of the UK monetary policy outlook in the wake of hawkish comments by Mark Carney (i.e. “there are limits to the MPC’s willingness to look through a temporary inflation overshoot”). Moreover, the wave of (SSA) issuance hitting the market yesterday, including a €2bn 10yr re-opening by the EFSF, surely also weighed heavily on Bunds. Note that the €1bn 24yr deal printed by Slovenia at MS +90 implied a 5-7bp concession to secondary market levels, though some would argue that it is the new bond that is fairly priced. Stronger-than-expected US macro data accounted for the remaining share of upward yield pressure. Here we need to see whether the upbeat picture painted by the preliminary PMIs will be confirmed in next week’s ISM surveys. All in all, we continue to believe that risk events including the US elections and Italy’s referendum plus speculation about an extension of ECB QE in December will keep a lid on any further sell-off pressures. Interestingly, Reuters reported yesterday that the ECB will almost certainly keep buying bonds beyond March next year and that changes to the capital key, issuer limit and depo rate floor for PSPP purchases were all under consideration. We stick to our view that a combination of increasing the issuer and ISIN limit for non-CAC bonds and relaxing the depo rate floor will be preferred over abandoning the capital key or more exotic options like buying senior bank bonds (although an expansion to bank loans would make a better choice). Tomorrow’s EGB supply. The Italian Tesoro will reopen the BTP 0.35 11/21 (€2.25- 2.75bn) and the BTP 1.25 12/26 (€2-2.5bn). It will also launch a new floater CCTeu 2/24 (€2.75-3.25bn)