Banks Snap Up $1.5 Trillion of ECB’s Cheap Loans
The European Central Bank reached another trillion-euro milestone in its fight to bolster economies that are seeing years of growth wiped out in months by the coronavirus pandemic.
An offer for its ultra-cheap, three-year loans was taken up by 742 banks for a total of 1.31 trillion euros ($1.5 trillion) on Thursday. That’s in line with predictions of 1.2 trillion to 1.5 trillion euros.
The loans are intended to ensure banks keep providing credit to companies and households to bolster the economic recovery from the pandemic. They carry an interest rate below zero that means the ECB is paying lenders to lend.
The fresh wave of stimulus comes at a time when fear about a potential second wave of Covid-19 infections is stalking investor sentiment.
The money also provides funding that could be used to buy higher-yielding assets such as Italian debt, complementing other ECB programs that aim to curb unwarranted market volatility.
Three-month Euribor’s premium over swaps — a proxy for funding stress — stayed 2.5 basis points higher at 10 basis points, following the outcome. This left it above the lowest level since March which was set on Wednesday.
“This should be taken positively,” said Antoine Bouvet, rates strategist at ING Groep NV. “The main impact is that the additional liquidity reduces overall risk in the system.”
Italian bonds pared gains after the 2-year yield briefly fell to the lowest level since March. Three-month Euribor futures contracts which are tied to the funding rate erased their advance.
The ECB is fighting to help European economies deal with the biggest contraction in living memory. The institution’s 1.35 trillion euro pandemic purchase program has served as a backstop to euro-zone debt markets, helping boost the appeal of even the riskiest of government bonds. Italy saw the yield on its benchmark bond tumble more than 150 basis points from its highest point in March.
Yet Citigroup Inc. estimates that the recent 600 billion-euro increase in asset purchases could fall 150 billion euros short of the bloc’s overall increase in debt supply.
Last week alone, sovereigns raised 32 billion euros from the sale of syndicated bonds, pushing total issuance in Europe to 1 trillion euros so far this year. A German auction this week sold the largest amount of 10-year bonds since 2014.
Why TLTROs?
Isabel Schnabel, the ECB’s board member in charge of market operations, said last week that surveys point to a take-up of around 1.4 trillion euros for its targeted loans, known as TLTROs, which hold offers every three months.
Schnabel said in a tweet after the results were published that the operation will add a net 548.5 billion euros in liquidity.
“It is certainly a positive development,” said Jaime Costero, rates strategist at UBS Group AG. “This should continue to support, mainly, front-end peripheral rates.”
Strong demand should also provide reassurance that the policy remains a viable weapon in the ECB’s arsenal, alongside its emergency bond-buying.
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The potential significance for wider risk appetite from the TLTRO number has grown in line with concern that the global rebound since March’s lows could have run too far ahead of fundamentals. Any sign that the recovery could face a setback is likely to stand out more starkly against that backdrop.
“Just stay long BTPs and if there are set-backs then you use this to add to the position” said Jens Peter Sorensen, chief analyst at Danske Bank A/S, referring to Italian government bonds. “If you cannot buy Italy, then go for Spain.”
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