A Touch Narrower, Off Session Extremes, Goldman Flag Preference For Further Tightening

German ASWs are a touch narrower on the day, but off session tights. Late on Thursday, in light of the ECB tweak re: remuneration on mandatory deposits, Goldman Sachs noted that “the ECB remains uncomfortable with the consequences of its large balance sheet, both in terms of profitability and side effect with respect to market functioning, although evidence suggest collateral scarcity is improving in the Euro area.”

• “The clearest market expression for such a balance sheet policy outlook remains to position for tighter swap spreads, in our view. While a downside surprise to German issuance later in the year is a risk to this view, we think important hurdles for tightening have been cleared, such as this spring’s banking tensions or the change in the ECB remuneration of government deposits on May 1st. On this latter point, we note that during the June ECB meeting Board Member Schnabel stated the change in remuneration “had achieved the desired effects”. This suggests that the risk of another ECB change incentivising governments to turn to money market paper is modest at this stage.”