ECB Tapering Talk Sends Core Rates Higher

Core rates jumped higher on the news that the ECB was already mulling details of a QE tapering strategy. We would argue, though, that ahead of any tapering, the QE program will be extended in December first. The ECB was also fast to clarify that the “governing council has not discusses these topics”. 10yr Bund yields closer to -0.05% should bode well for today’s €4bn tap of the DBR 8/26. Nonetheless, bearish momentum could gain more traction with today’s US data. The ADP employment report will provide a first glimpse into Friday’s official job data, where our economists expect an above consensus +210k in the non-farm payrolls.

Italy finally launched the long awaited 50yr benchmark yesterday. Demand for the new BTP 2.8 3/67 was strong. The order book topped €18bn, allowing the Tesoro to set the final size of the syndication at €5bn. The pricing spread versus the BTP 3/47 was set at 52bp, below the initial target of “mid/high 50s”. While news flow on Italy still concentrates on the upcoming referendum, BTPs slightly outperformed SPGBs yesterday.

ECB APP monthly figures released yesterday show that QE purchases surpassed the €80bn monthly target by €5bn in September, i.e. frontloading for December is already on the way. The PSPP accounted for €70bn, of which €7.1bn were in Supras. NCB purchases moved out the maturity spectrum in most jurisdictions. We calculate that the Bundesbank has on average bought longer the 10yrs for the first time since the start of the program. Only the weighted average maturities of Austrian and Belgian purchases fell back noticeably, but they remained above 10yrs. The ECB continues to compensate slower purchases in smaller markets by buying more in larger EGB markets like Germany, France and Italy. While purchases in Portugal have deviated somewhat less from the capital key split, it still implies the ECB bought €0.5bn less than it should have. The cumulative, absolute differences versus target for the program so far remain modest: Portugal currently runs €1.8bn below “target”. Germany, France and Italy are around €10bn ahead. For Germany that is less than one month’s worth of purchases.