Morgan Stanley on « QE and beyond »

From Srikanth Sankaran & Shrina B. Poojara at Morgan Stanley fixed income research team:

« We maintain a constructive bias on credit heading into Thursday’s ECB meeting. Despite the outperformance of European credit in recent months, we do not think that QE upside is fully priced in. A 20-25bp compression in IG spreads is likely, should the ECB deliver.    

Sovereign QE is now our economists’ base case: Our economists’ base case now is €500 billion of government bond purchases and €100 billion of private sector asset purchases. In terms of timing, the complexity of designing a sovereign QE programme makes January 22 an ambitious start day. Announcement in January and execution in March is more realistic, they think. »

« Credit is likely to benefit even from a compromised version of QE: In our view, IG credit stands to benefit from a sizeable purchase plan even if it focuses exclusively on government bonds. QE is also likely to be positive for credit – with or without risk-pooling.

But design may determine sensitivity to Greece: Despite our constructive view on QE’s impact in isolation, QE design and perceived aggression may determine peripheral credit’s response to the developments in Greece. The lack of core-peripheral spread tiering suggests that contagion risks are currently not in the price.

EM, oil and deflation risks are tension points: We remain wary of the interplay between QE on the one hand and deflation risks and escalation of the Greek situation on the other. These are likely to be the key tension points as we progress through 2015. »

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