Rate Re-Pricing & Wider Spreads Following ECB Meeting

Euro area government bonds have broadly traded weaker and core-periphery spreads have widened following yesterday's ECB meeting.

• The ECB meeting was notably hawkish. Official inflation forecasts were revised higher, with inflation marginally above target in 2024. President Lagarde indicated the strong likelihood of a 50bp hike in September and a series of hikes thereafter.
• While this hawkish pivot has underpinned repricing at the short-end, indications that the ECB did not discuss an anti-fragmentation tool at the June meeting (although Lagarde stressed they could introduce this if they wanted), has fueled spread widening.
• Core curves have twist flattened. The very long end of the German curve is now 9bp flatter on the day.
• Most of the movement in the OATs curve has been at the shorter end where rate-repricing has driven up yields. The 2s30s spread has narrowed 6bp.
• BTPs have sold off sharply at the short end with benchmark 2-5-year yields up 11-18bp.
• Supply this morning came from Italy (BOTs, EUR6.5bn)