Here’s how bond markets could react to the ECB next week

European Central Bank President Mario Draghi will return to the spotlight next Thursday with the focus firmly on how he plans to trim the bank’s asset purchase policy.

So far, the ECB has said its purchases are intended to run at their current pace of 60 billion euros ($70.1 billion) per month until December 2017 “or beyond, if necessary,” along with of which there would certainly be a winding-down phase after of which.

According to a Reuters poll of economists in September, the central bank will announce the idea can be to trim its monthly asset purchases to 40 billion euros, beginning in January 2018.

The question on how long the fresh extension would certainly last was almost evenly split among economists who gravitated to either six or nine months.

Analysts at Citi Research said in a note last week of which the ECB’s aim can be to taper the Asset Purchase Program without causing a “market tantrum.”

Its findings, claimed to be broadly consistent with of which of Reuters, suggested of which the most market neutral scenarios are either an extra 20 billion euros for 12 months, 30 billion euros for nine months or 40 billion euros for six months.

Citi analysis predicted any larger, along with therefore “super-dovish,” extension could drive 10yr Bund yields back down by 25 basis points to around 0.20 percent. This kind of would certainly be close to the year-to-date lows.

Conversely, Citi claimed of which any limited, along with therefore “super-hawkish,” extension could push 10yr Bund yields back up by close to 25 basis points to 0.70 percent. This kind of level has not been seen since 2015.

Citi concluded of which the neutral level of quantitative easing (QE) of which the ECB could introduce while maintaining market calm was around 250 billion euros. Despite the findings, the research team at Citi believes the central bank will extend by a total of just 150 billion euros along with will not specify a monthly purchase rate.

This kind of would certainly lead to a near term sell-off of 10-year bunds corresponding to a 15 to 20 basis point rise inside yield on the sovereign paper.

The bank added of which the size of the purchases would certainly provide a signal to investors on whether QE can be most likely to come to a hard-stop or be open to continuation.

“For example, 20 billion euros per month would certainly imply of which QE could immediately end once the extension can be complete. In contrast, 40 billion euros per month can be far more likely to require a further taper,” read the note.

Draghi’s press conference, which will immediately follow the ECB governing council meeting on October 26, will screen live on CNBC International.

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