SSA Market: Dovish tapering - Rabobank

According to the Research Team at Rabobank, the price action that followed the last Thursdays ECB meeting suggested that the bond market had interpreted the lowering of the monthly purchase rate hawkishly, with the Bund curve steepening significantly.

Key Quotes

“Last Thursday the ECB made three major changes to the PSPP: 1) An extension of the programme, with purchases made at a rate of EUR 60bn per month from April to December 2017 (i.e. a step down from the existing rate of EUR 80bn;  2) A change in the minimum maturity of bonds that can be purchased, taking it from 2yr down to 1yr; 3) The introduction of the ability to purchase bonds ‘to the extent that is necessary’ that are trading at a yield below the (-40bp) deposit rate.”

“The price action that followed the meeting suggested that the bond market had interpreted the lowering of the monthly purchase rate hawkishly, with the Bund curve steepening significantly. However, at the same time there was a pronounced weakening of the euro and a rally in equities – both indicative that more stimulus than expected had been announced. The question was of course which response was correct?”

“Interestingly, (and as suggested above) the Bank noted that buying sub -40bp was an option that could be used when it became "necessary". According to our calculations, the Bundesbank – which had been under pressure to source enough eligible debt ahead of the recent ‘taper talk and Trump-inspired’ curve steepening will be able to continue buying Bunds until c.a. July next year before it nears/hits the 33% issue limit. As such, there is no immediate necessity to skew purchases toward the German front end suggesting (at least to us) the bearish steepening looks to be overdone.”

“The announcement suggests that rather than fewer purchases being made (the 9 mth extension at a 60bn/mth rate actually equates to EUR60bn more in total asset purchases) even more govvie, agency and sub-sovereign supply is to be absorbed by the PSPP. That the announcement is perhaps the Bank’s attempt to engineer a ‘soft tapering’, to adjust the market’s expectations and to slowly but surely adjust the programme toward a conclusion without actually referring to a US-style hard deadline end to asset purchases is perhaps the ECB’s answer to adjusting the market’s psyche without toppling the apple cart.”