Wednesday is Long-Term Refinancing Operation roll day — the most significant European funding rollover since the expiry of the €442bn 12-month LTRO back in June.
About €225bn worth of European Central Bank liquidity largess will be maturing on September 30, as three operations come to an end (a €132bn three-month, €18bn six-month and €75bn one-year). Banks will get a chance to roll into new operations this Wednesday, specifically a new three-month LTRO. Thursday will also see the start of a six-day fine-tuning operation.
According to the ECB’s Money Market Contact Group, the three-month operation may prove especially attractive to banks since it matures in December, which might, “according to some banks’ expectations, be the last LTRO with full allotment.”
It’s all boring excess liquidity stuff, but it does provide a useful data point on the two-tiered European interbank market and may help dictate the potential pace of the European exit strategy.
Here for instance, is Nomura’s European rates team:
The ECB 3M LTRO allotment is today. We expect some larger usage from burdened peripherals like Ireland or Portugal, where banks are unable to fund on the open market (although this will not be released until later October). As a whole, we expect a modest downtick in the LTRO usage from the maturing … operations … Releases as low as €180-200bn are within expectations for the LTRO while some of the financing should move to 1W cash and a smaller portion is likely to be withdrawn altogether. Any continued market-induced withdrawal of excess liquidity should put further upward pressure on EONIA and the FRA-OIS spread.
Which brings us nicely to the European exit strategy.
From Barclays Capital’s Giuseppe Maraffino:
Today in the Eurozone attention will be on the result of the 3M LTRO which, together with tomorrow’s 6-day fine-tuning operation, will be used by banks to refinance EUR 225bn of liquidity in three repo operations at the ECB maturing tomorrow … we expect EUR 160bn to be allotted today and EUR 50bn to be allotted tomorrow. All in all, EUR 15bn is likely not to be rolled. Over the last few days, EONIA has fixed mildly lower, with some volatility on EONIA forward rates and the Euribor strips, probably related also to ECB’s Stark comments that the ECB is in the process of phasing out non-standard measures. A sharp increase in EONIA fixing and short rates is likely in the case of low bidding at today’s 3M LTRO, which would suggest a reduction in borrowing or a shift into the 6-day. Both of them would facilitate the ECB resuming its exit strategy by allowing it to drop the full allotment over time at the 3M LTRO. This, as much as the change in the liquidity surplus, is likely to push short rates up.
Tuesday’s weekly Main Refinancing Operation, incidentally, saw €166bn of liquidity allotted versus €153bn maturing — or about €13bn in liquidity added to the system. Total bidders were also up, at 129 versus around 110 in the last few operations, when allotment was around €150bn, according to BarCap figures.
This could be an indicator of some banks demanding more liquidity, but it might also just be nerves ahead of Wednesday’s three-month op. In fact, the MRO behaviour seems to be rather similar to what happened back in June — when the June 29 MRO leaped from €151bn to €163bn, and bidders increased from 114 to 157. The expiry of the €442bn 12-month LTRO turned out to be something of a damp squib, with only €132bn rolled over into a three-month op, far below estimates of €220bn – €250bn.
This week’s three-month LTRO allotment figures are due on the ECB website at around 10.15am London time.
Update: Results are out, via Bloomberg. The ECB will lend €104bn in the three-month LTRO to 182 banks. Still to come; Thursday’s six-day tender.
Related links:
The slooooww death of Europe’s excess liquidity – FT Alphaville
Money markets gear up for ECB deadline on Thursday - Reuters
Timing liquidity withdrawal as ECB addiction persists - MNI