Bank of Japan invoked further easing, motivated by a slow down in overseas economy.

Overnight, The Bank of Japan has invoked further monetary easing. It has expanded the size of its fund for asset buying by Y10 tln to Y80 tln (split Y5 tln in JGBs and Y5 tln in Treasury discount bills). The BoJ reported its decision was motivated by a slowdown in the overseas economy. As a consequence of that it downgraded its overall economic assessment. It's rate action was to ensure Japan's economy returned to a sustainable growth path, it said. In Europe, Juncker did not waver from the script with regard to Spain – the conditions imposed on Spain for financial assistance would be 'very tough.' Interestingly, for all the suggestions from Spain that it was in preliminary discussions as to what a hypothetical program might look like, Juncker seemed to suggest that very little had been talked over. On Spain’s subject S&P said it is unlikely to be cut to non-investment grade in the near future. S&P currently have them at BBB+.

All this sort of laid the ground for a Fixed Income rally in Europe but we believe the key driver has again been the deluge of corporate issuance and a very low 3M fixing (-0.6 bps, a drop twice the size of the expectations). BHP Billiton, KfW, Cades, OMV to only name a few have hit the market with several billions in sometimes long dated paper. As most of it has been swapped to floating, duration hedging fuelled the futures rally while ASW were down another 2 bps, which is a result given the sizes involved. In the middle of all this the Schatz auction was pretty much a non event.

Tomorrow European PMIs are published, a modest rebound is expected but only a strong deviation would get the market excited. We do not expect any breach of the last 2 days range on the Bund, the short end will depend on the behavior of the fixings.