Salient to Investors:

Owen Murfin at BlackRock said:

  • Bond investors have been too hasty to bet the ECB will buy sovereign debt
  • The ECB’s target of increasing its balance sheet by $1.29 trillion is ambitious and the poor take-up of new cheap loans offered to banks is no guarantee of QE – a second tranche in December is likely to be larger.
  • Be cautious on periphery sovereign bonds as they are pricing in too much of a probability of sovereign QE in Europe. They have rallied without any pullback more on optimism about a very accommodative ECB rather than massive fundamental improvement.

Andrew Balls at Pimco said:

  • The weakening euro-area economy makes QE more likely even while ECB policy has reduced the risk of another regional debt crisis.
  • The credibility of the ECB’s inflation target is in doubt so a full-blown QE program would be their most practical approach.
  • Pimco is overweight on peripheral securities, especially Spain and Italy
  • Euro-area volatility will be suppressed as the ECB rolls out its stimulus measures.

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