European SSA Market: Opportunity knocking - Rabobank

Research Team at Rabobank, notes that the ECB held pat last Thursday, going only so far as to suggest that the “relevant committees” are examining the QE programme and associated changes which may be needed.

Key Quotes

“Our recent work on the possible options the ECB has at its disposal suggests that no one measure will prove sufficient in providing the ECB with the ammunition it needs in order to expand the programme beyond March 2017. On Friday Bloomberg news quoted the ECB’s Ilmars Rimsevics as stating that the committee will work until December, examining the capital key, bond purchases and a reduction in the deposit rate.

The increased scarcity of assets available for purchase by some of the larger, core NCB’s reinforces our long held view that support for German Länder and increasingly for the comparatively scarce universe of Dutch agency bonds remains in place. We anticipate the DNB will be increasingly compelled to turn to Dutch agencies. That said, with BNG having already raised c.a. €14.6bn of its annual target of €16bn (estimate 15bn – 16bn) and NWB having raised c.a. €9.8bn of €13bn (estimate 10bn - 13bn) tight supply conditions do not look set to ease near term.

Trader comments

• Fixed income credit markets have recently benefited from an inexorable tightening bias uninterrupted since the seminal March ECB meeting when the PSPP began. Whilst it would be extremely premature to call and end to the move it is undeniable that the tone this morning is significantly softer. Given the forces at work behind the bullish trend in the SSA sector in particular we would suggest that the move has not been extinguished but merely paused and that this could be an appropriate moment to add.

• The SSA sector trades predominantly on an RV basis versus sovereigns and the back up in govt bond yields witnessed subsequent to last Thursday’s ECB meeting has not detracted from the attractiveness of the SSA issues. If anything the recent bear steepening has added to the appeal of the sector as many of those bonds previously trading with a negative yield have now moved firmly back into positive territory.”