ECB's monetary policy divergence in action

The euro area sees continued strength in activity data and weakness in inflation data. As a result, rates markets have been driven primarily by developments abroad, on-going concerns over China, compounded by the revelations over emissions testing, have led to a risk-off move in equities, similarly the Fed's decision to forego a rate hike in September has led to concerns that the global economic outlook is weaker than previously priced. 

"Consequently Bunds have spent another month in our 50-75 bp trading range. Given the ECB's desire to maintain the expectation of monetary policy divergence that has weakened the Euro, the ECB is expected to announce additional accommodation already at the 22 October meeting", says Bank of America. 

This will, further anchor forwards in the belly of the curve and make carry and roll-down trades very attractive, put renewed widening pressure on the Bund-Treasury spread, and risks creating fears of a government bond shortage again, especially as net issuance turns negative for the fourth quarter.