Under Pressure, ECB Sources Dominate

A fresh wave of selling knocks Bunds through previous session lows, before a recovery from worst levels. Bears continue to breach intermediate support levels, a continuation would expose 129.72, the Aug 15 low and a key support.

• Benchmark German cash benchmarks run 2-4bp cheaper, with a light flattening bias.
• Yesterday’s hawkish ECB sources piece from RTRS continues to reverberate, with related OIS pricing titled higher, albeit off hawkish extremes (around 17bp of tightening is now showing for tomorrow).
• Initial glances at the Eurozone IP data suggest that Irish data may have skewed the release once again.
• Core/semi-core spreads little changed to a touch wider vs. Bunds.
• Most peripherals widen by 1-2bp vs. Bunds given the ECB repricing/presence of supply.
• Greece provides the exception, narrowing at the margin after yesterday’s widening (some sell-side names remain constructive on GGBs ahead of Moody’s scheduled sovereign rating review of Greece on Friday).
• A quick reminder that our policy team has flagged its understanding that “the ECB is only likely to begin in-depth discussions over its balance sheet reduction after the conclusion of its operational framework review due by the end of the year.”
• Also note that the ECB has suggested that the Italian banking tax may create problems re: legal uncertainty, as well as pose headwinds re: bank funding.