FOMC and Global Bond Yields

The Fed´s second rate hike for this cycle is looming, but the Fed is highly unlikely to pull the trigger tonight, with the presidential elections now in their final week. At most we could see a firmer guidance for a hike in December for which markets are currently discounting a c. 70% probability. In any case, the 16% discounted chance for a move tonight would still have to be priced out at the front-end.

 10yr Bund yields continued to hover below their 5-month high of 0.20% yesterday, while Bund volumes remained contained with large parts of Europe off due to All Saints day. Having managed to dodge a broader EGB widening trend amid positive domestic political developments, SPGBs have taken a breather and widened by some 8bp in the 10yr sector versus Bunds. €2.5 to 3.5bn in 5yr, 10yr and 15yr supply are scheduled for tomorrow, which may already call for some concession. Nonetheless, also BTPs have been dragged wider alongside again. Just to highlight how lopsided sentiment has become here: the latest Sentix survey reveals investors now see a greater chance for Italy leaving the EMU than Greece. The 10yr BTP/SPGB spread looks increasingly stretched having widened to 45bp.

TLTRO take-up: Interestingly, the ECB yesterday published the country breakdown of the consolidated financial statement of the Eurosystem for the end of September. The breakdown revealed that banks in Germany and Italy were the main users of the second TLTRO-II (two additional operations are scheduled for December and March 2017). Indeed, LTRO borrowings provided by the Bundesbank and Banca d’Italia jumped, respectively, by €10bn and €14bn in September (Figure 1). Banks in Italy now have almost €190bn in LTRO borrowings. EGB supply today, Germany will tap the 10yr on-the-run DBR 8/26. “Elevated” outright yields, Bund ASWs in the middle of their QE range (if one ignores the episode surrounding the Brexit vote) and the prospect of QE extension should catch the interest. But demand should also be ensured by the fact that the bond has been trading very special in repo over the past few days. Ireland has announced to tap the IRISH 2.4 5/30 for €0.75bn tomorrow.