Thu, Jul 05, 2018 - Page 10 News List

French yields dip amid ECB moves

Bloomberg

Speculation that the European Central Bank (ECB) is to introduce an “operation twist” after it ends its asset-purchase plan is turning the French yield curve on its head.

The yield on France’s 30-year bonds on Tuesday dropped to its lowest level in 19 months, reducing the premium over five-year notes to the least since November 2016.

A media report last week said that the ECB would reinvest proceeds from maturing bonds into longer-dated securities amid a shrinking pool of eligible debt.

ECB President Mario Draghi last month said that the bank would halt its asset buying in December, while maturing debt would be reinvested for an extended period after the end of net purchases.

Policymakers also plan to keep interest rates at current record lows “at least through the summer of 2019,” Draghi said.

With holdings of German bonds close to the ECB’s self-imposed 33 percent cap, the central bank is likely to buy in “semi-core” and “peripheral” nations such as France, Spain and Italy, Morgan Stanley said.

The US bank recommends that investors put on an outright flattening trade in 10 and 30-year French bonds. Barclays PLC also expects the yield spread to narrow.

“The flexibility for operation twist on the German curve is fairly limited,” Morgan Stanley strategist Elaine Lin wrote in a note to clients. “The scope to buy across the curve on the larger sovereigns, i.e. France, Italy and Spain, is much more meaningful.”

The US Federal Reserve in 2011 implemented a program that came to be known as “Operation Twist,” which saw it sell its short-dated US Department of the Treasury holdings to buy longer-dated debt.

There are some signs of disagreement over whether the ECB should distort reinvestments, with Bundesbank member Joachim Wuermeling saying that the German central bank does not believe in monetary policy-related adjustments.

French 30-year bond yields on Tuesday fell to 1.48 percent in London, the lowest since November 2016.

The spread over five and 10-year peers was little changed yesterday at about 149 basis points and 84 basis points respectively.

The latest monthly quantitative easing data from the ECB showed that the bank switched to a longer duration approach, Commerzbank AG said.

The German bank estimated that the weighted average maturity of sovereign bonds bought last month was 10.1 years.

The comparable estimate for French bonds was 11.4 years, according to Bloomberg calculations.

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