As a harbinger of what may be in store in Friday’s US jobs report, surprisingly strong ADP data pushed bond yields higher yesterday. The 10yr UST yield topped 2.56% as markets assess the Fed’s potential hiking pace for the year. The discounted odds for a hike at the March meeting have risen to 90%. By the end of the year the effective fed funds rate is now seen some 65bp above the current average, which can be interpreted as a c. 60% probability for a third hike this year being discounted.
10yr Bund yields were dragged higher alongside to 0.37% with Bund ASWs largely reversing Tuesday’s widening. EGB spreads versus Bunds saw only moderate widening pressure with 10yr OAT/Bund widening just 1bp yesterday, while only slightly underperforming OLOs. With a new Harris poll showing Macron overtaking Le Pen in the first round, OATS may receive some tailwind today.
ECB meeting. Today’s focus will be squarely on the ECB, but we do not expect any changes to policy or communication against the backdrop of increased political risks. Rather we believe that the ECB will want to reinsure markets with more dovish tones. Nonetheless, the money market curve re-steepened yesterday, dragged higher with the overall rates market. The June 2018 ECB dated EONIA forward is up at -0.24bp again, some 11bp above current average EONIA fixing. We doubt whether the ECB will alter its forward guidance already at today’s meeting, although a risk remains that larger revisions of the staff forecasts might outweigh an unchanged guidance. Our economists believe smaller upticks to the headline inflation projection on the basis of adjusted underlying assumptions regarding oil prices and/or the exchange rate might be possible. However the core inflation profile should be more important, and here the ECB is more likely to reiterate that there is little evidence of self-sustainable inflation yet. Accordingly, we do not expect any discussion regarding a tapering to have occurred at this point.
EGB supply. Only Ireland will be active today reopening the IRISHs 5/26 and 2/45 for a combined €1-1.25bn. Italy announced a new 7yr BTP 5/24 (€3-3.5bn) for auction on 13 March. Alongside the Tesoro will also reopen the BTP 10/19 (€2.25-2.75bn) as well as the BTPs 9/33 and 9/46 (combined €2-2.75bn).