European Government Bonds; QE purchases and supply
The risk-off move in EGBs on the back of yet another North Korean nuclear test was fairly shallow, suggesting markets have gotten used to North Korea’s sabre rattling – or are increasingly convinced that a military response from the US is unlikely. Indeed, while 10yr Bund yields edged 1.5bp lower and 5yr German paper outperformed 0.5bp on the 2/5/10yr fly yesterday, core EGB curves actually steepened (admittedly, in part due to the large amount of long-end supply due to hit markets this week), with the 30yr Buxl ASW tightening 1bp. What is more, long-end peripheral spreads over Bunds also managed to tighten, by some 2-4bp. That being said, flows were light yesterday due to the closure of US markets, meaning the impact may have been delayed somewhat.

ECB QE purchases: During the summer lull net QE purchases slowed to €50b in August, versus the stated monthly target €60bn, ECB data released yesterday revealed. Net PSPP purchases accounted for slightly more than 85% of the total, in line with previous months. While net purchases allocated to Germany were back in line with the ECB’s capital key split, purchases in French and Italian paper continued to overshoot their implicit targets more substantially. Calculating the maturity of monthly purchases based on the weighted average maturity (WAM) of portfolio holdings is becoming increasingly distorted by redemptions. In Germany, where redemptions should still play a minor role, the calculated WAM of last month’s purchases increased slightly to 5.8yrs from 5.18yrs.

EGB & SSA supply: Today Austria will re-open 10yr and 20yr lines for a combined €1.4bn (including retention). The RAGB 4/27, at almost -20bp on ASW, offers a 9bp pickup in z-spread versus the NETHER 7/27 and is trading at a small concession again vs the ESM 3/27 line. The RAGB 3/37 was trading exceptionally rich on ASW in early August, but has since been on a cheapening trend, to now trade in the -15bp area. Elsewhere, KfW is likely to come to the market to issue a new 10yr benchmark, a KfW 9/27. We find 10yr KfW sector trading cheap versus NEDWBK and EU. Looking at mid z spread levels, switches from the latter might even offer a pick-up (or minor give up, respectively) when looking at the KFW 2/27 versus EU 9/26 or EU 11/27 for instance. Elsewhere, Spain’s ICO has mandated banks for a new € benchmark 4/22.