EGB/Gilt: Unscheduled ECB Meeting Triggers Spread Compression

European government bonds have rallied sharply this morning on the back of the ECB announcing that an unscheduled meeting is taking place today to "discuss market conditions", although specific details are sparse.

• The rally has been led by the EGB periphery, with spreads narrowing on speculation that the ECB could be ready to announce a new anti-fragmentation tool. Again, for the time being, details are sparse with no indication of what is being discussed beyond current market conditions.
• The ECB's Pierre Wunsch has said that the next 150-200bp of hikes are 'no brainers' and that the ECB is 'very open' to stepping in if markets overreact.
• According to a Bloomberg report, people familiar with the meeting have indicated that PEPP reinvestments are the first response tool. Given that the intention to use PEPP reinvestments if needed has already been signalled, an announcement today along these lines could trigger a sell-off in EGBs. Markets are instead looking for details of a new instrument to tackle widening spreads.
• BTPs have outperformed the wider region with yields now down 26-40bp. The 10-year BTP-bund spread has narrowed to 219bp from yesterday's intraday high of 244bp.
• The bund curve has bull steepened with the 2s30s spread widening 6bp.
• OATs have rallied with the belly of the curve outperforming. Cash yields are 9-13bp lower.
• Gilts have followed EGBs higher with yields now down 7-14bp.
• Supply this morning came from Portugal (BTs, EUR500mn) and Finland (RFGB, EUR666mn).