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Buy the rumour sell the fact – DB

FXStreet (Barcelona) - Analysts at Deutsche Bank note that the prospect of ECB buying in is being priced in the Bunds and European Government Bonds, which is the replication of the kind of rally that happens in US between bouts of QE.

Key Quotes

“Staying on core rates it is also worth noting that 10yr Bund yields went through the October 15th's flight to quality all time closing lows of 0.756%. Indeed the 10yr Bund yield fell by 3bp to 0.748% yesterday. Its an impressive achievement as when we were at these levels in the stress of 6 weeks ago, Crossover closed at 401bp (now 334bp) and Stoxx 600 at 311 (now 346) so European Government bonds and even Bunds just keep on performing even with risk-on back in vogue.”

“Obviously the prospect of ECB buying is increasingly being priced in. One thing that makes us slightly nervous of this trade continuing is that the experience of the US was that Treasuries tended to rally most between bouts of QE and not during. So will it be a case of "buy the rumour sell the fact" if and when QE happens?”

“However Japan's mega QE and still ultra low yields is a cautionary tale that the US experience isn't necessarily a fool proof template but maybe the BoJ are buying far more of the JGB market than their peers thus really completely distorting the price. So there are a number of things to consider but it’s not a slam dunk that bunds will continue to be strong after QE.”

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