By Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank is coming below pressure from bankers to lend extra of its stash of German authorities bonds to avert a market squeeze that might undo a few of its personal stimulus efforts.
As the most secure debt within the area, Germany’s sovereign bonds are the lifeblood of European monetary markets and probably the most coveted collateral for guaranteeing trades at clearing homes.
But there aren’t sufficient of them to fulfill demand within the 8.3-trillion-euro ($9.3 trillion) market for repurchase agreements, or repos, the place traders swap money for bonds.
This is as a result of the ECB – largely through Germany’s Bundesbank – has hoovered up almost a 3rd of German public debt in an effort to assist the euro zone financial system since 2015 and, with renewed impetus, throughout the COVID-19 pandemic.
Having drained the markets with its multi-trillion-euro debt-buying programmes, the ECB has left fewer bonds sitting on sellers’ stability sheet and obtainable to be borrowed on the repo market.
Investors are at the moment paying 0.99% to borrow German bonds in opposition to money for 2 months, implying a 7% charge for bonds lent on Dec. 31 for the next Monday, knowledge on Refinitiv Eikon reveals. Borrowing the debt for 2 months price 0.6% two months in the past.
So bankers are clamouring for the ECB, and significantly the Bundesbank, to lend extra of its bonds to avert a drought which might price them dearly and may even push some into default.
“If a major bank or fund cannot meet its obligation towards a central clearing counterpart, the CCP must place it in default which triggers defaults at all other CCPs,” mentioned Godfried De Vidts, a senior advisor to the International Capital Market Association commerce physique.
Ironically for the ECB, the scarcity of German bonds obtainable to be borrowed dangers inflicting funding markets to seize up, making credit score costlier and going in opposition to the spirit of the central financial institution’s easy-money coverage.
German bonds commerce at their highest premium to swaps for the reason that peak of the pandemic and spreads on company bonds have began two widen, albeit from very tight ranges.
Squeeze constructing in German bonds: https://fingfx.thomsonreuters.com/gfx/mkt/jnpwexnoqpw/Squeeze%20building%20on%20German%20bonds.png
This may flip right into a headache for the ECB because it weighs how to wind down its pandemic-fighting programme in December with out upsetting monetary markets.
“If I were working at the ECB, given the lack of monetary policy levers available to me, I’d make sure the market is as little distressed as possible,” Peter Chatwell, a strategist at dealer Mizuho mentioned.
The situation has been effervescent within the background for years but it surely has blown out in latest days on investor concern a few German bond pinch round year-end when issuance falls and banks shrink their stability sheets to meet regulatory calls for.
The ECB doubled the quantity of bonds that the 19 central banks of the euro zone can lend in opposition to money to 150 billion euros from 75 billion euros final week.
But analysts say this isn’t fixing the issue as a result of banks are working in opposition to a constraint on what number of bonds they’ll borrow.
This is a safeguard that central banks have in place to minimise the danger they take and to incentive debtors to flip to the market as a substitute.
“The counterparty limit is the real problem,” Giuseppe Maraffino, a hard and fast revenue strategist at Barclays (LON:) Investment Bank, mentioned.
“If we were to see more transactions failing, we think the Bundesbank and the other euro area central banks could consider raising the counterparty limit, at least
Credit is costlier even for the most secure firms: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomkgxwvd/Spreads%20widening%20even%20for%20safest%20borrowers.png
($1 = 0.8909 euros)