Last week, Bloomberg ran a story that, according to 'ECB sources', the ECB was considering tapering its current EUR80bn a month QE programme (scaling down bond purchases). The ECB has been eager to 'kill the story' but the genie is out of the bottle and the market is now on 'tapering alert'. However, it is not our main view that the ECB is going to announce or even discuss 'tapering' in the next three months and we continue to expect the ECB to announce a six-month extension to QE purchases at the December meeting (monthly purchases maintained at EUR80bn). Hence, we keep our view that neither short yields nor long yields will rise significantly over the next three months.
The big unknown is how the market will react to an actual ECB 'tapering' of its QE programme or a decision not to prolong the purchases at all, when we look 12M ahead. Even though we already expect to see mainly 10Y EUR rates higher on a 12M horizon, the risk has become more asymmetric, being skewed on the upside, not only for 10Y rates but also for 5Y maturities, which are normally sensitive to changes in the monetary policy outlook.
Another important event will be the December Fed meeting. Admittedly, it is a close call as to whether or not the Fed will hike in December but we still think it will eventually decide to stay on hold, as we believe it was too optimistic on the current economic situation at the latest FOMC meeting in September - but here also the risk is skewed towards a rate hike.
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