Global Volatility and Credit
The widening move in peripheral spreads as seen yesterday contrasted sharply with the broader risk-on move in equities. Indeed, while Eurozone equities gained 1% and Italian bank shares typically a few percentage points more, the 10yr BTP/Bund spread rose by 2bp to the widest level in nearly three weeks. Interestingly, peripheral government bonds outperformed Germany in the 5yr area. This was partly due to central bank buying under the PSPP (note that core bonds are ineligible as their yields are below the depo rate floor), but may also reflect some concession build in the run up to today’s tap of the 5yr OBL 0 10/21. Elsewhere, the results from the BoE Gilt buying operation suggested real money accounts continue to be reluctant to sell longer-dated maturities. In the third 15yr+ operation since the new round of £QE started the cover ratio dropped back to 1.54 versus 2.67 last week. While unlike the very first long-end buyback yesterday’s auction was still covered, the average tail (i.e. the highest accepted minus the average price on the bonds the BoE received offers for) increased to 83 pence from 11 pence last week. It seems the BoE is increasingly competing with pension funds at the long end of the curve. And one should not forget that after the first three rounds of £QE (starting in 2009) the BoE already owned around 25% of the nominal outstanding in the long-end bucket (and more than 30% in the rest). In our view this holds important lessons for the ECB’s €QE programme. In particular with a view to the potential extension of the March-2017 reference date in September, it shows that higher issue share limits for non-CAC bonds may not be the solution to alleviate scarcity concerns.