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Analysis-ECB faces pressure to unlock bonds and avert market squeeze By Reuters

© Reuters. FILE PHOTO: European Union (EU) flags fly in entrance of the European Central Bank (ECB) headquarters in Frankfurt, Germany, December 3, 2015. REUTERS/Ralph Orlowski/File Photo

By Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank is coming underneath pressure from bankers to lend extra of its stash of German authorities bonds to avert a market squeeze that may 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 essentially 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.Three trillion) market for repurchase agreements, or repos, the place traders swap money for bonds.

This is as a result of the ECB – principally through Germany’s Bundesbank – has hoovered up practically a 3rd of German public debt in an effort to assist the euro zone financial system since 2015 and, with renewed impetus, in the course of 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 accessible to be borrowed on the repo market.

Investors are at the moment paying 0.99% to borrow German bonds towards money for 2 months, implying a 7% fee for bonds lent on Dec. 31 for the next Monday, knowledge on Refinitiv Eikon reveals. Borrowing the debt for 2 months value 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 value them dearly and would possibly 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,” stated Godfried De Vidts, a senior advisor to the International Capital Market Association commerce physique.

Ironically for the ECB, the scarcity of German bonds accessible to be borrowed dangers inflicting funding markets to seize up, making credit score costlier and going towards the spirit of the central financial institution’s easy-money coverage.

German bonds commerce at their highest premium to swaps because the 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 stated.

The subject has been effervescent within the background for years nevertheless it 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 towards 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 operating towards a constraint on what number of bonds they’ll borrow.

This is a safeguard that central banks have in place to minimise the chance they take and to incentive debtors to flip to the market as an alternative.

“The counterparty limit is the real problem,” Giuseppe Maraffino, a hard and fast earnings strategist at Barclays (LON:) Investment Bank, stated.

“If we have been to see extra transactions failing, we expect the Bundesbank and the opposite euro space central banks may take into account elevating the counterparty restrict, not less than

briefly.”

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)


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