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Rate Re-Pricing & Wider Spreads Following ECB Meeting

BOND SUMMARY

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)
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