The European Central Bank’s latest attempt to sterilise its government bond purchases has landed with a resounding thud. Results from the ECB’s Tuesday one-week fixed-term deposit (FTD) auction, in which it planned to drain the €55bn of extra liquidity created by its €55bn of bond-buying, are in.
And they are not pretty:
The ECB failed to auction the €55bn in fixed term deposits it had planned to, and what it did auction (€31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.
What’s going on? A lot, and that’s probably the difficulty.
As Barclays Capital’s Cagdas Aksu pointed out before the results of the FTD:
Also ahead of the 3m LTRO on Wednesday, the ECB will conduct two operations today. First, there will be the normal weekly MRO: amounts have increased there to stand at EUR152bn, and some of that might be rolled over into the 3m LTRO tomorrow, maybe up to EUR50bn. Effectively, the less the roll today in the weekly MRO, the higher the chance that we might get a higher roll in general in the 3m LTRO tomorrow. There is a one-day gap between the settlement of the two operations, and this might lead to some usage of the marginal lending facility for one day. Also, the ECB will be draining the EUR55bn that it has bought in bonds in the SMP. This is interesting since, with the big rollover just one day later and likely a drop in the overall liquidity surplus (to say EUR100-150bn), it might get more difficult/expensive for the ECB to drain that surplus liquidity, which could start pushing Eonia rates higher.
As for the Main Refinancing Operation (MRO) — that saw €162.9bn allotted, with 157 banks bidding.
That’s rather above the €152bn allocated last week, for 114 banks; which by BarCap’s logic suggests a smaller chance of a big rollover from the 12-month and into the three-month LTRO later on.
Still, one to watch.