ECB gave a strong hint that it plans on restructuring its QE program - RBS

Research Team at RBS, notes that the ECB’s decision to leave its policy stance steady and its growth forecast and inflation outlook nearly completely unchanged sparked a jump in both core and periphery European sovereign yields, dragging US government bond yields higher along with them.

Key Quotes

“German 10yr bund yields rose over 5bp on the session. The move brought US 10yr yields quickly back into the 1.601.65% range seen ahead of Monday’s ISM nonmanufacturing and the curve bear steepened as the long-end took the brunt of the selloff.

The ECB did give a strong hint that it plans on restructuring its QE program at some point to ensure both “smooth implementation” of its program and to “preserve the very substantial amount of monetary support that is embedded in our staff projections.” But that signal wasn’t enough for market participants who appear to have entered today’s decision looking for an adjustment to the QE program and/or a formal extension of the “end date” of the program from the current “March 2017 or beyond if necessary.” Our colleagues in EU rates strategy still see an expansion of easing before the end of the year as a base case, given their expectation that the growth and inflation data underwhelm.”