ECB meeting March 3rd

The main focus today was the ECB meeting undoubtedly, leaving aside the auctions in Spain and France which were highly paid.
With the announcement of a rise in interest rates next month, the Bund / Bobl & Schatz fell to the minimum 122.66 / 115.96 / 107.59. At that time the spread of Spain against Germany came to narrow 205 basis points, then went hand in hand with the drop of futures.

However, Spain, Belgium and Italy (Semi-Periphery) underperformed 2/3 less than the rest of EU countries:
-In the 2 yrs: 21bps Germany, Nether 21.4, Austria 19.7, France 19.5, Italy 15.8, Belgium 15.2 and Spain 12.6bps.
-5 yrs: Ger 17.2 / 15.1 NL / FR 15 / AT 15.5 / BG 9.8 / IT 13.3 / SPAIN 8bps only.
-10yrs: GER 10.3 / FR 8.6 / NL 9.5 / AT 10 / BG 5.4 / IT 9.1 / 5.9 SPAIN.

This is flattening all the market (Core, periphery, Swaps, etc)…

Take a look at the German yield curve.

Also, what we are seeing in the past week is a new positive correlation between Spain and Germany, when back in the days; the fall of the Bund used to help narrow the spread between Spain/Germany…Today this fact is less important as the correlation is starting to increase.

Check graph below between the 10 yrs benchmarks Spain/Germany.

Spanish auction went allright, placing €3.8bn (3-4bn target). Good demand and lower yield than previous times.

- The 3.25% Apr'16 was tapped for €2.65bn @ 4.389% (4.542% in Jan), obtaining a b/c of 2.17x times in the auction (2.1x in Jan). Marg rate @ 4.408% (vs 4.59% in Jan). According to my BBG, this reference closed yesterday at 4.40%, 15bp off February's yield highs (2.55% on 14 Feb); it had cheapened this morning 2bp before the auction (4.42%).

- The 4.75% Jul'14 was tapped for €1.15bn @ 3.592%, obtaining a b/c of 3.04x times in the auction. Marg rate @3.609%. This reference had not been tapped since May'09, so comparison with previous auction adds no value. According to my BBG, this reference closed yesterday at 3.63%, 13bp off February's yield highs (3.76% on 14 Feb); it had cheapened this morning 3bp before the auction (3.66%).

On the French very solid auction they delivered €8.9bn (in line with €8-9bn target). Paid above mid market.

-OAT 4.25 10/17: €2.1bn @3.08% average yield

-OAT 4.25 10/18: €1.4bn @3.27% (cheaper than last one @2.92%)

-OAT 2.5 10/20: €3.22bn @3.61% (at same level in last auction)

-OAT 3.5 4/26 €2.11bn @3.97% (last @3.76%)

As it was expected in the ECB meeting, rates remain unchanged for the moment although JCT said that interest rates could be raised at the next policy meeting in April (but not to expect BIG rate move), and Trichet warned on inflation “It is the duty of all central banks, including the ECB, to preserve the solid anchoring of inflation expectations.'' and blames “oil prices shock”.

"Reports from the 12 Federal Reserve districts indicated that the overall economic activity continued to expand at a moderate pace in January and early February," the Fed's Beige Book. Main conclusions are that the economy is slowly growing, improving the retail and manufacturing output without upward pressure on wages, the labor market remains weak and improved housing market. President of NY FED has repeated that rates are likely to stay low for an extend period. This is for sure one of the drivers today in the opening of the Bund which opened with a big gap below yesterday’s closing price.

Also in US employment initial claims have remained at 368.000 (395.000 expected).

Tomorrow very focus in the change of Nonfarm payrolls at 14:30 (Survey 195k).

EUR/USD continues to rises to 1.394 levels (highest in 2011).