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Unscheduled ECB meeting dominates morning session (1/2)

BONDS
  • It's the day of the Fed meeting but all the attention so far this morning has been on the unscheduled ad hoc ECB meeting which was due to begin at 10:00BST / 5:00ET. The ECB is expected to discuss recent market moves, potentially discuss in more detail the "anti-fragmentation tool", of which we know has been mentioned at ECB press conferences but we have never seen details of.
  • After closing yesterday at 244bp, 10-year BTP-Bund spreads reached a low of 214.5bp (down over 29bp since yesterday) but have seen given back some of that move to be down 19bp on the day at writing at 223bp.
  • We expect spreads to widen again if the ECB does nothing more than state it will reinvest maturing PEPP proceeds more in peripheral debt than the capital key suggests - this is something that they can already do and wouldn't be a new policy. For spreads to meaningfully tighten further from here we would need some kind of commitment to sell core bonds to buy peripheral bonds, or for all PEPP reinvestments to be used to buy peripheral debt.
  • Bund yields are only down by 1bp or so on the day, with the German curve bull steepening by about 4.7bp.

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