German government bonds are opening lower Thursday on profit-taking following strong rebound yesterday in the wake of the ECB’s inaugural 3-year LTRO. Most in the market have dismissed the ECB’s 3-year LTRO as a damp squib and another can kicking exercise, where the central bank has merely pumped cheap money into the euro banking system. However, in order for this to work, the banks that borrowed money from the ECB are required to swap cash into high-yielding EMU peripheral bonds, rather than sit or hoard the cash, which is a big ask in current market conditions. In addition, there are questions about whether the LTRO is enough to cover the European deleveraging needs. Attention today is on Italy’s Senate final approval on austerity measures, where vote is due to start around 1300GMT. Ahead of this, Italy 10-year spread is trading at +481bps, having widened 19bps yesterday. Spain 10-year spread is at +359bps, having widened 20bps yesterday. Greece is underperforming amid uncertainty over PSI involvement in debt restructuring deal, with 10-year spread 147bps wider at +3506bps.
EasyForexNews Research Team