Economic and Financial Analysis

Rates

9 April 2020 Rates Daily: Second shot at a deal Article As a rule, don't stand in front of a market sell-off even if central are more than ever intent on capping borrowing costs for the whole economy. The Eurogroup gets another shot at a deal today, something which is mostly relevant for peripheral yields

Content

- Central purchases are priced in... - ...but not the debt tsunami - Today’s events: ECB minutes, pains and Italian auctions

Central bank purchases are priced in... Germany's issuance planning update this week was only the most notable of a long series of increased borrowing programmes from sovereigns. We would argue that borrowing needs for the economy as a whole are rising fast, so the question is whether central banks can keep up and buy debt in comparable quantities. The answer is yes. We think they have no choice but to keep yields across the curve and across the rating spectrum low in order to ease spiralling debt dynamics. The FOMC minutes published last night show that not all members were previously on board with explicitly lowering long-end yields through QE. However, the bank has since made purchases unlimited showing that these reservations have changed. Today's speech by FOMC Chairman Jerome Powell at 4pm CET will be a chance to make that clear. This being said, the swift and aggressive central bank purchase programmes are now largely discounted. This week has shown that there is more debt issuance to come. In all likelihood a lot of the now private debt is going to end up on the public sector's balance sheet but the point is moot: someone has to buy it and the lender of last resort is the central bank. Pending another barrage of asset purchases, we think rates are skewed higher.

...but not the debt tsunami Today's Eurogroup meeting is a case in point. The few hundreds of billion being discussed are likely to be only a fraction of the additional borrowing that the crisis will require from the in the coming years. For instance, the reportedly told the Eurogroup that €1.5 trillion of measures in 2020 alone will be needed, and ECB President Christine Lagarde repeated her call for more fiscal easing overnight. Failure to act now would only swap one reason for borrowing- emergency support measures- for another- falling tax revenues. What the plan does in effect is break the news to the bond market, in the absence of firm deficit and borrowing targets from sovereigns. In a sense, the dearth of detailed plans is understandable given how fluid the situation is, but investors should not be fooled into thinking there is anything other than a debt tsunami on the horizon. The defence against this is known and effective: central bank purchases. At the moment though, the ball is in the fiscal authorities’ court, and this could be an unpleasant time for bond holders.

Previous debt tsunamis: Eurozone nominal sovereign debt

Source: Eurostat, ING

Today’s events: ECB minutes, money market pains and Italian auctions Today the ECB will release the accounts of the 12 March and 18 March meetings, where the central bank launched a barrage of new measures, though shied away from cutting rates. They may reveal in greater detail the pressure points that have worried policy makers, to the extent that they broke with previously thought sacrosanct limits of their QE programmes when the Pandemic Emergency Purchase Programme was introduced less than a week after the first meeting. While the ECB also aimed new measures at money markets, introducing a series of weekly LTROs for instance, the rise in Euribor fixings by 9 basis points in the last week alone may well keep policy makers on high alert. The current crisis is a crucial test of the new Euribor, a reform that was concluded only late last year after all 18 panel banks were phased in to the new hybrid waterfall methodology. It is not immune to general banking stress and, with a particular view to the eurozone, to a re-emergence of fragmented interbank and wholesale short term funding markets, driven by the same worries that have pushed government bond spreads sharply wider over recent weeks. Spreads have been reined in to a degree by the ECB’s new emrgency purchase program - PEPP. Italian government bond spreads over Bunds pulled back to 200bp after previously widening on disappointing news regarding the progress of joint EU support measures. The ECB is likely to have had a hand in this, thus providing support ahead of today’s Italian debt auctions of €9.5bn across 3y to 30Y tenors.

Padhraic Garvey, CFA Regional Head of Research, Americas 1 646 424 7837 [email protected]

Benjamin Schroeder Senior Rates Strategist +31 20 563 8955 [email protected]

Antoine Bouvet Senior Rates Strategist +44 20 7767 6279 [email protected] Disclaimer

This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. ("ING") solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. ING forms part of ING Group (being for this purpose ING Group NV and its subsidiary and affiliated companies). The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice. The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions. Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved. ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam). In the United Kingdom this information is approved and/or communicated by ING Bank N.V., London Branch. ING Bank N.V., London Branch is deemed authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. The nature and extent of consumer protections may differ from those for firms based in the UK. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website. ING Bank N.V., London branch is registered in England (Registration number BR000341) at 8-10 Moorgate, London EC2 6DA. For US Investors: Any person wishing to discuss this report or effect transactions in any security discussed herein should contact ING Financial Markets LLC, which is a member of the NYSE, FINRA and SIPC and part of ING, and which has accepted responsibility for the distribution of this report in the United States under applicable requirements.