Research Team at Deutsche Bank, suggests that the package of ECB policy measures announced at the March meeting was at the upper end of their and arguably consensus expectations. Key Quotes “However, this is not reflected in the market response with real yields higher, equities weaker and the euro stronger. On the positive side, credit spreads tightened and periphery outperformed vs. core • The ECB delivered less than market expectations on rate cuts but in a positive fashion. A 10bp cut to the deposit facility rate along with the indication that deeper cuts to the deposit facility rates further should reduce the market’s concerns about the impact on bank profitability due to a further decline in the deposit facility rate. However, the compression of net interest margin for banks due to declining asset yields will persist • On the other measures, the ECB delivered at the upper-end of the market’s expectations. The EUR 20bn increase in pace of QE and 4Y TLTROs at generous terms are clearly oriented towards credit easing • The increase in QE pace was accompanied by an inclusion of corporate bonds in the eligible universe. Nevertheless, concerns about availability of bonds in core countries such as Germany have not been fully addressed • On the TLTROs our ex-ante view was that any such measure is unlikely to be a game changer but should provide a backstop to a significant widening in bank credit spreads. The terms of the TLTROs announced are more favourable than expected as they can obtain 4Y funding at zero rates with no conditionality in terms of usage or repayment and the potential benefit of further reduction in borrowing costs. • It could be that the take-up at the TLTRO2 disappoints and is limited to roll over of existing TLTRO1 take-up but relative to pre meeting expectations this remains a better than expected outcome and is supportive of weaker banks • We recommend a 10s30s flattener in Germany which should benefit from the continued demand/supply imbalance in core countries and would be consistent with an easing of financing conditions resulting in a decline in Eurozone GDP weighted 5Y forward 5Y real yields • We recommend a Buxl spread widener vs. Schatz spread tightener to position for greater demand/supply imbalance at the long-end of core curves and easing of funding concerns which should tighten front-end FRA-OIS spreads • We recommend being long 5Y Italy which should benefit from the credit easing measures including the increased pace of QE and TLTROs • We maintain our long 10Y inflation breakeven and exit the paid position in April ECB Eonia” For more information, read our latest forex news.