By Francesco Canepa
FRANKFURT (Reuters) – European Central Bank is under pressure from bankers to lend more of its German government bond pool to avoid a market squeeze that would cancel out some of its own stimulus efforts.
As the region’s safest debt, German sovereign bonds are the lifeblood of European financial markets and the most coveted collateral to secure transactions in clearing houses.
But there is not enough to meet demand in the market for 8.3 trillion euros ($ 9.3 trillion) of repo or repo agreements, where investors exchange money for bonds. .
Indeed, the ECB – mainly through the German Bundesbank – has collected almost a third of German public debt in a bid to support the euro area economy since 2015 and, with new impetus, during the COVID pandemic. -19.
After draining the markets with its multibillion-euro debt buyback programs, the ECB left fewer bonds on brokers’ balance sheets and available for borrowing in the repo market.
Investors are currently paying 0.99% to borrow German bonds for cash for two months, implying a rate of 7% for bonds loaned on December 31 for the following Monday, according to data from Refinitiv Eikon. Borrowing debt for two months cost 0.6% two months ago.
Thus, the bankers are asking the ECB, and in particular the Bundesbank, to lend more of its bonds to avoid a drought that would cost them dearly and could even push some into default.
“If a large bank or fund cannot meet its obligations to a central counterparty, the CCP has to default it, which triggers defaults at all other CCPs,” said Godfried De Vidts, senior advisor to the CCP. trade body of the International Capital Market Association.
Ironically for the ECB, the shortage of German bonds available for borrowing risks seizing funding markets, making credit more expensive and going against the spirit of the easy money policy of the central bank.
German bonds are trading at their highest premium over swaps since the height of the pandemic and corporate bond spreads have started to widen twice, albeit from very tight levels.
Squeeze building in German bonds: https://fingfx.thomsonreuters.com/gfx/mkt/jnpwexnoqpw/Squeeze%20building%20on%20German%20bonds.png
This could become a headache for the ECB as it reflects on how to end its pandemic program in December without disrupting financial markets.
“If I worked at the ECB, given the lack of monetary policy levers at my disposal, I would make the market as smooth as possible,” said Peter Chatwell, strategist at brokerage Mizuho.
The problem has been simmering in the background for years, but it has erupted in recent days amid investor worries about a tightening in German bonds towards the end of the year when issuance falls and banks reduce their balance sheets to respond. regulatory requirements.
The ECB has doubled the amount of bonds that the 19 central banks in the euro area can lend for cash to 150 billion euros from 75 billion euros last week.
But analysts say that doesn’t solve the problem as banks face a constraint on the number of bonds they can borrow.
This is a safeguard put in place by central banks to minimize the risk they take and encourage borrowers to turn to the market instead.
“The counterparty limit is the real issue,” said Giuseppe Maraffino, bond strategist at Barclays Investment Bank.
“If we were to see more trades fail, we think the Bundesbank and other central banks in the euro area might consider raising the counterparty limit, at least
Credit is more expensive even for the most secure businesses: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomkgxwvd/Spreads%20widening%20even%20for%20safe%20borrowers.png
($ 1 = 0.8909 euros)
(Reporting by Francesco Canepa; Editing by Emelia Sithole-Matarise)