On Wednesday, the European Central Bank had a technical hiccup.
It accidentally published a “test message” outlining details of the planned sale of €10bn worth of three-month debt certificates to help mop up some eurozone liquidity. The sale was quickly squashed by ECB spokespeople, but the idea is continuing to appear in market commentary on Thursday.
At the moment, the ECB is sterilising its purchases by auctioning one-week fixed-term deposits. Issuing three-month debt certificates, in contrast, would mean a rather longer maturity for the sterilisation.
Or, as IFR Markets’ Divyang Shah points out, almost on a par with the Federal Reserve:
The ECB describes it as a “test message” that should be disregarded but clearly the ECB has published early details of their desire to effectively extend sterilization from 7-days to 3-months. The details were published on a test page and reported by newswires and involve the sale of 3-month debt certificates of EUR 10bn later today. The debt certificates will be sold at variable rates of up to 1.0% with settlement on Monday (Jun 14) and maturity on Sept 13. The extension of liquidity absorbing policy to 3-months puts the ECB in line with the Fed who will look to absorb liquidity via their Term Deposit Facility with terms of 14, 28- and 84-days (with the first test due to start on June 14).
The ECB’s move highlights that the current sterilization via 7-day operations is reaching its limit and this has been evident in recent Fixed Term Deposit operations. The cover ratios have been moving lower, the total number of bidders has also been moving lower and the yield has had to be increased to entice banks to deposit funds. The trend on the term deposits is even more interesting given the record build up of deposits on an overnight basis which only pays 0.25%.
The risk of not being able to absorb enough funds seems to be enough for the ECB to term out their deposit facility. The last thing that the ECB wants is to fan concerns over their ability to sterilize and have this concern feed-through into questions over whether it will impact their ability to intervene in the peripheral bond markets.
Sterilisation aside, issuing debt certificates could be a rather fiddly thing for the ECB to pull off.
As mentioned yesterday, the central bank would need to price the debt certificates above the level of its one-week fixed-term deposits (at 0.31 per cent but creeping higher) while competing with other types of European short-term debt.
Expect at least one question on the certificate subject when the ECB holds its monthly press conference later on Thursday.
Related links:
The ECB’s debt certificates. (Ah wait, nevermind). – FT Alphaville
Sterilised and scandalised - FT Alphaville
The slippery slope to non-sterilisation – FT Alphaville