Market Economics | Interest Rate Strategy - BNP PARIBAS ...

EUR: Limited Nervousness at ECB Tenders
• Recent ECB tenders (1-week and 3-month)
showed signs of nervousness, while liquidity
spreads in markets reflected limited pressures.
Chart 1: Upward Pressure on OIS/BOR Spreads
• The global environment favours such limited
pressures, but the ECB’s upcoming operations
could add to them.
• STRATEGY: Keep OIS/BOR spread paying
interest for the moment.
Only signs of nervousness so far…
There were some signs of nervousness at the latest
two tenders conducted by the ECB. At the first
3-month tender at variable rates, while the ECB had
announced an indicative allocation of EUR 15bn
(versus 3.3bn maturing and a large excess of
liquidity), and despite a low number of bidders, the
maximum bid rate (and allocated) was 1.50%, 50bp
above the minimum bid rate and just 25bp below the
rate at the marginal lending facility. This was not a
sign of pressures coming from a reduced allocation.
Rather, it was a sign that a limited number of bidders
feared that the ECB could, in fact, allot significantly
less than the indicative amount and wanted to be
sure that they would receive the amount they bid.
This shows that as soon as the ECB allows bid rates
to climb, the move is significant, and surely more
significant than the ECB would like. Indeed, the
average weighted rate was 1.15%, with a spread on
the refi rate well above the average spread seen at
this kind of operation before the liquidity crisis started
in 2007 (6-7bp).
Nervousness was also seen at this week’s weekly
tender, despite the fixed rate and full allotment
procedure. Demand for 1-week liquidity rose along
with the number of bidders from the regular number
of around 65 to 76. The increase in the number of
bidders reflects either that a larger number of banks
wish to remain hidden when buying liquidity, or a
moderate increase of the number of banks struggling
to access liquidity at market conditions. In both
cases, this is not the sign of fully relaxed conditions.
When, at the same time, OIS/BOR spreads widen
significantly, though from very low levels, it is a sign
that there is some nervousness in the market at the
moment. The global situation (wider spreads, higher
volatility and lower risk appetite) could explain this
modest increase in nervousness which, clearly, has
remained limited so far. But these signs were clear
enough to attract attention and the ECB’s upcoming
tenders will be closely scrutinised.
Source: BNP Paribas
Upcoming tenders more at risk
As the global situation is not improving at all with
respect to risk aversion, credit assessment and
access to market liquidity, upcoming tenders should
continue to point to nervousness if not tensions. The
next 3-month LTRO will be conducted at a variable
rate, but this time more than EUR 10bn is maturing
(EUR 10.2bn). We saw last time that, although the
indicative amount of EUR 15bn was more than four
times the amount expiring, there were bids 50bp
above the refi rate. If the ECB wants to avoid the
same risk, it will have to keep at least the same ratio
between the indicative amount and the amount that
will be demanded. This is why the ECB could
announce an indicative amount in the region of
EUR 30-35bn in order to keep market participants
confident they will be allotted. At the same time, the
risk is, with a large indicative amount, to see almost
all bids at the minimum rate.
When it comes to the weekly tender the ECB will
conduct next week, demand and the number of
bidders will provide evidence as to whether this
week’s nervousness was a short-lived incident or if
tensions on liquidity are gradually mounting. Current
market conditions do not point to signs of an
improvement and therefore demand at next week’s
tender could be as high as it was this week, although
the market is still running with a large excess of
liquidity compared with needs. Such a confirmation
will keep short-term spreads on the wide side in
coming days.
Strategy: Current conditions are unlikely to favour a
reduction of stress. Maintain OIS/BOR spreads
paying interest for the moment.
Patrick Jacq 7 May 2010
Market Mover, Non-Objective Research Section
43
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