| Story Views | |
| Now: | |
| Last Hour: | |
| Last 24 Hours: | |
| Total: | |
Will Thursday’s Final TLTRO Finally Spark Carry Trades?
zerohedge.com / By Nick Kounis of ABN Amro / Mar 23, 2017
Euro Rates Watch – Will the TLTRO spark carry trades?
- The last of the ECB’s TLTRO-II operations is expected to have a big take up, with the market expecting EUR 125bn, and some forecasts as high as EUR 300bn
- From a rates perspective, what matters is whether these funds will trigger flows into the bond or swap markets as banks set up carry trades
- Carry trades have certainly looked attractive and currently there is a possible spread of around 80bp between the rate on the TLTRO and similar maturity peripheral bonds
- However, there is little evidence that banks have used TLTRO-II funds for carry trades over the last few months
- Eurozone bank government bond holdings have actually fallen sharply since the first TLTRO-II…
- …while a very small proportion of banks said they would use the funds to buy assets in the ECB’s Bank Lending Survey
- Finally, there was no discernible impact on government bond curves around the time of the TLTROs…
- ….and only a temporary impact on swap spreads in one of the three operations
- Overall, we doubt the last of the TLTRO’s will have a major lasting impact on bond or swap markets
The impact of TLTRO-II on the eurozone rates market
On Thursday, the ECB will hold its fourth tender under the TLTRO-II (Targeted Long-Term Refinancing Operations) programme. A large take-up is expected. A poll published by Reuters had a median forecast of EUR 125bn net borrowing (EUR 141bn gross given banks will repay EUR 16.74bn), with estimates as high as EUR 300bn. From a rates perspective, what matters is whether these funds will trigger flows into the bond or swap markets as banks set up carry trades. Certainly, carry trades can be attractive. At the time of past operations there has been a possible spread of around 40bp between the rate on the TLTRO and similar maturity peripheral bonds. Currently this spread has risen to around 80bp, given the rise in peripheral yields. In this note we assess how likely it is that we will see a major impact on bond and swap markets by looking at the impact of the first three tenders, which saw a cumulative net take up of EUR 138bn. We first take a look at what banks have said about the uses of TLTRO funds in the ECB’s Bank Lending Survey. We go on to look at bank bond holdings. Finally, we analyse price movements in the bond and swap markets around the time of the TLTROs.
The post Will Thursday’s Final TLTRO Finally Spark Carry Trades? appeared first on Silver For The People.
Source: http://silveristhenew.com/2017/03/23/will-thursdays-final-tltro-finally-spark-carry-trades/
