ECB will almost certainly contemplate the removal of the deposit rate floor – RBC CM

Research Team at RBC Capital Markets, suggests that one element that the ECB will almost certainly contemplate when they meet on 8-September will be the removal of the deposit rate floor in order to avoid squeezing the long end of the Bund curve.

Key Quotes

“If this is (one of) the tools that the ECB will employ, the market is very likely to expect that Bund buying will shift significantly down the curve again – as all of a sudden the shorter dated German bonds will become available to the Bundesbank again (recall, that the preferred buying of the latter is indeed the short part of the curve and the average maturity at the beginning of the QE programme was much shorter than it is now for the Bund holdings). This should make the Schatz richen again. Make no mistake, we do not for a second think that rate cuts are a realistic option and ‘merely’ expect a substantial richening of cash bonds and thus the Schatz to perform relative versus the EONIA curve.”