ANALYSIS: ECB Governing Council gathers to discuss current market conditions

Analysis details (09:54)

• A report ahead of the European open noted that the ECB is to hold an ad-hoc Governing Council meeting today at 10:00BST, to discuss current market conditions; the meeting is expected to last around two hours.


• The spread between German and Italian 10yr yields subsequently narrowed to around 225bps when cash bond trading got underway, having scaled levels above 250bps earlier in the week.


• Subsequent reporting via Bloomberg noted that policymakers will discuss reinvestments of PEPP and its ability to tilt reinvestments towards weaker nations.


• That said, it is worth noting that such a discussion would be in-fitting with the pledges already made in the ECB's policy statement which notes "In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time."


• Capital Economics notes five potential options for the ECB:

1. Repeat stronger language that it won't allow fragmentation


2. Announce creation of an anti-fragmentation tool in coming days/weeks without giving details


3. Earmark a pot of money to counter fragmentation risk


4. Change its rules to allow more flexible PEPP reinvestments


5. Announce a ready-to-go anti-fragmentation tool that can be implemented soon

• Elsewhere, Rabobank expects today's announcement to more likely see the tweak of an existing instrument which will disappoint the market. Thereafter, "the ECB will then be required to take more definitive action in a couple of weeks’ time as spread widening pressure renews". 

15 Jun 2022 - 09:54- Fixed IncomeImportant- Source: Newsquawk