There can be no doubt that ECB President Trichet will again characterise interest rates as “appropriate” next week. While the case for keeping policy accommodation in place remains compelling, however, one should not overlook that monetary conditions are changing nevertheless! Following this week’s LTRO expiry, excess liquidity in money markets will stay lower and the maturity of outstanding operations will be shorter than before – with important implications for various rates: Money market term premia should be higher, we see upside risks to Euribor-related short-term rates, the curve flattening bias looks set to persist for now and breakevens have further to fall, keeping nominal Bund yields subdued. More near-term we treat 10y Bunds with yields near 2.5% as a better selling opportunity. In covered bonds, there would be good arguments or continued central bank buying after the ECB’s official purchase programme deadline has just expired. Given that the former format has revealed some flaws, however, these should be carried out under the more flexible framework of the SMP.Click on charts to enlarge, courtesy of Commerzbank.
On the other side of the pond, the trading guys at Goldman Sachs are pointing, among other things, to a break-down of yield curve steepening in the US. This does not bode well for banking bulls ... ?
Click on charts to enlarge, courtesy of Goldman Sachs.