Martin Van, Research Analyst at ING, suggests that yesterday’s comments by ECB President Draghi confirm that further monetary stimulus is on the way, but left markets guessing as to what precise form it will take. Key Quotes “Draghi identified two factors that could trigger further action: (i) “the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations” and (ii) “the state of transmission of our monetary impulses by the financial system and in particular by banks”. With the 5*5y inflation swap rate holding below 1.5% and Eurozone hourly pay growth having slipped to just 0.7% YoY, there’s little doubt that at least the first condition for further easing has been met. In the wake of Draghi’s comments, the German 5yr yield dropped 2bp to end the day 2.5bp lower at -0.31%. ECB dated EONIA forwards, meanwhile, nudged 1bp lower virtually across the board, with the March contract at - 0.36% now pricing in a roughly 20% probability of a -20bp cut. Interestingly, the BUND ASW spread held above 40bp yesterday despite the risk-on move in equities. We find it trades roughly in line with where we would expect it to trade based on fundamental determinants, which cannot be said of the 30-year swap spread, which, at around 18bp, remains 6bp wider than our fair value estimate (we model the 30yr swap spread as being a function of risk aversion, the 10s30s curve, swaption vol and the BUND ASW and already incorporate ECB QE as a dummy variable). This tells us that markets are braced for some form of expansion to the QE programme. On the supply front, Austria announced the launch of a new 10-year bond yesterday, the RAGB 10/2026. Based on the existing 1.2 10/25, 4.85 3/26 and 6.25 7/27 lines, we see fair value at around MS +2bp.” For more information, read our latest forex news.