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ECB 1-1 FED

20 June 2019 by jbchevrel

Today was marked by another aggressive broad-based rally in risky assets, following the FOMC yesterday. The Main s31 however, closed little changed (-0.3bp), widening back the c2bp relative to CDX IG s32 it had taken on Tuesday. After the ECB (cf. Tuesday’s Grapple), it was the turn of the Fed to hammer protection cost with accommodative rhetoric. Pricing-wise, the $ OIS market shows one cut fully priced in for July, then one for September and one for December. The UST curve kept bull steepening with the 10y point falling temporarily below 2%. On the € side of the equation, the pricing is little changed with 10bp cut by September. Beyond the Europe-US IG spread, it was noteworthy that firstly the US HY sector outperformed the US IG sector. Indeed, CDX HY re-compressed 3bp vs CDX IG, on a 1:4 basis. And secondly, among sovereign CDS, EM outperformed DM and EM HY outperformed EM IG. This is because of the relative dependence on $ rates of these different segments of the market. And this explains why, among other things, Turkey 5-year CDS can be tighter by 20bp on a day where President Erdogan said 1/ “We would have our own sanctions against them” speaking about the US 2/ “it’s not the end of the world” if Turkey can’t get F-35 fighter jets from the US 3/ while the Fed is moving closer to lowering rates, “the policy rate in my country is 24%, this is unacceptable”.