ECB preview: no surprise in the rates action, but what about the forward guidance? i) we expect 25bp of rate cuts in this week’s meeting, a further 50bp in 1Q25 and a pause (to evaluate the impact) thereafter. ii) e don’t expect the ECB to make it clear what the pace for rates will be in 2025 as soon as in the December meeting, but it could start elaborating more on how far rates are from this neutral reference. iii) unless the wording is sufficiently dovish (not our expectation) there may be some room for disappointment amongst the dovish part of the market
Curves outlook: just bear squaring in long-term yields or something else?: i) consistent with the testing of “lower bounds” by yields, we keep open the possibility that US Treasury yields may visit references around 4.00-4.10%, but with limited risk of breaching them; ii) Bund yields – although also visiting references around the lower bounds of their respective range (2.10%) – look relatively well supported at these levels with no big risk of further sharp corrections; iii) from a tactical standpoint, we see room for spread compression between curves (now at 204bp in the 10Y, it could test references slightly below 200bp); unless the ECB delivers a (surprising) hawkish message (in our view feasible at some point in the future but not likely at this week’s meeting) there could be room for a relative steepening of the Euro curve vs. the US one
Tactical approach on peripherals: i) at these levels, we now see limited chances for the BTP-Bund spread to continue to tighten (close to the lower bound both looking at BTP-Bund spread or ratio measures), and considering the round of Italian supply we might expect some cheapening in RV terms. More room for spread tightening exists for Spain; ii) in terms of curves slope, in the next few weeks we expect Spain and Portugal might show a more pronounced flattening in the 10Y-30Y vs. Italy and core/semi-core curves.
Weekly supply. On the bills market total issuance will be c.EUR24.2bn in gross terms (c.EUR16.7bn in net terms). In bonds Austria and Italy will be active this week. Total issuance is expected to be c.EUR9.6bn in gross terms but a negative c.EUR7.5bn in net terms (redemptions from Germany).