The sell-off in 10yr Bunds took a pause yesterday, as some flight to safety on the back of the missile test conducted by North Korea and dovish comments by ECB Executive Board member Peter Praet underpinned demand. The volume of the Bund future, however, was almost 50% below its 10-day moving average thanks to the closure of US markets. Moreover, yields on 30yr German paper continued their ascend. Meanwhile, semi-core and peripheral bonds managed to squeeze out some further tightening verus Bunds, with OLOs and Bonos bucking the trend though – which makes sense given their tight levels relative to comparables. Interestingly, we find 8-10yr Spain currently trading at the tighest level versus OLOs of the past two years. With US markets open again, the main focus today is on the release of the FOMC minutes, which should offer clues as to whether the intended changes to the balance sheet reinvestment policy are indeed forthcoming “relatively soon”. Interestingly, we find the fed funds strip between the Nov-17 and Jan-19 contract having re-steepened more than 10bp over the past two weeks, suggesting more and more market players are embracing the view that the Fed delays their next rate hike until December and announces the start date of the reinvestment policy changes at the September meeting.

ECB QE data. Net asset purchases in June amounted to €62.4bn. PSPP purchases accounted for €51.6bn (82.7%). Interestingly, purchases remained skewed towards France and Italy, whereas German purchases were roughly in line with the Bundesbank’s capital key in the ECB for the third month running. Furthermore, the weighted average maturity of German purchases jumped from 3.99 years in May to 5.33, the highest reading since January (we doubt the monthly WAM estimate was meaningfully influenced by the reinvestment of maturing holdings). This sheds further light on the strong tightening seen in Schatz ASW spreads last month EGB supply. Germany will launch a new 5yr OBL today. With the markets recently reassesing the ECB policy outlook, the 5yr segment has cheapened more than 10bp on the fly versus the 2s and 10s since the end of May, and more than 12bp on ASW. This should ensure today’s auction won’t fail. Also note that the OBL 10/22 traded at an attractive roll of 9bp in the grey market yesterday – and that 4-5yr OBLs trade at a concession versus the interpolated DBR curve.