Firmer, Spreads To Bunds Compress On Dovish ECB Hike

Any immediate EGB downside in reaction to the ECB’s decision to hike rates by 25bp (market pricing gave ~70% chances of a hike, while the BBG survey was tilted towards no move) is more than reversed.

• The deployment of the following passage has resulted in the classic ‘dovish hike’ price action: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.”
• Still, terminal policy rate pricing does nudge up to ~4.04% vs. ~4.00% pre-decision.
• The Bunds firm through 131.00, with a break of initial resistance at 131.14, the 20-day EMA noted. Bulls now look to 131.82, the Sep 4 high, as the next point of technical resistance as they try to turn the technical tide more in their favour.
• German cash benchmarks sit 5-7bp richer, with intermediates leading.
• Core, semi-core & peripheral EGBs compress to Bunds, with BTPs and GGBs now outperforming on the day, running ~3bp narrower vs. the German benchmark. Spread compression was facilitated by the aforementioned ECB passage.