Who said demand for German debt was floundering?
Monday’s auction of six-month Bubills pulled in an impressive average yield of no less than 0.0005 per cent — yes, that’s to the fourth decimal point.
A fact which proved too much for the Reuters table, which was forced to round up the result to 0.001 per cent:
All in all, it’s an unsurprising result given that six-month paper has been trading in negative territory on-and-off since at least November 30:
As have some other maturities, at least on the ask side of the bid-ask equation:
We should add that bid-ask quotes have also been widening significantly, at least with respect to all maturities trading near the zero mark.
What does it all mean? We would say it’s another indicator of Europe’s quality collateral crunch and the buy-and-hold mentality that’s gripping German bund markets. Something that’s making it very difficult to deal Eurozone bond markets if you happen to be a professional dealer.
It’s worth pointing out that over in the market for German bond collateral, the situation is equally unnerving.
German bonds are yet to trade at a negative repo rate, but according to ICAP’s Monday repo report, we got awfully close to the situation last Wednesday — which happened to be just before the world’s main central banks announced their coordinated dollar funding move.
As ICAP noted:
Just prior to this, 2-month German GC traded out in 2 months at 0.02% which proved a low, at least as far as we saw. Offers out past 3 months remain parked at zero but there is little prospect of trading while activity remains bunched into the shorter dates. Note that when we talk about German GC we are referring to the sub-10yr basket which is the benchmark trading instrument these days:
In other words not much is trading beyond three-month rates. We presume that’s because there is a stand-off with respect to being charged for negative rates, with everyone flocking into the short-term rate market instead, since it’s the only one which still guarantees mildly positive rates.
Negative repo rates imply that funding markets have to compensate counterparties if they want to lend them cash against bund collateral. Or from the perspective of the borrower, you have to paid an interest rate to be persuaded to borrow cash using your German bunds as collateral.
Given the situation, it’s hardly surprising that ICAP has registered a 10-15 per cent reduction in daily repo volumes running through their BrokerTec platform.
As they conclude:
It might well be that it is merely the prospect of a game changing EU summit at the end of next week that is keeping markets quiet fro now but he present situation in repo markets is clear enough – almost everybody seems to be holding flat positions.
As we’ve noted before, these dysfunctions could now be undermining central banks’ control of money markets.
Related links:
Draghi: “We are aware of the scarcity of eligible collateral” – FT Alphaville
ECB as Pawnbroker of Last Resort (POLR) – FT Alphaville
The decline of “safe” assets - FT Alphaville
The need to understand repo flows – Deus Ex Macchiato