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

EUR: Eonias to Push Up Further
• Excess liquidity continues to fall. Along with
less demand at the ECB’s liquidity providing
operations, this is pushing eonias up.
Chart 1: Liquidity Provided Started to Decline
• Figures at the early stage of the current
reserve period highlight further tensions ahead
on eonias.
• STRATEGY: Keep paying interest on eonias
for the November and December ECB meetings.
Liquidity continues to decline
The expiry of the 1y tender had reduced liquidity
provided by open market operations by around EUR
200bn, from more than EUR 900bn to just above
EUR 700bn. This was enough to trigger limited
upward pressures on eonias. But liquidity has
continued to fall. Demand at last week’s MRO was
EUR 45bn below the total maturing. Demand this
week fell again, with EUR 195.7bn allotted for EUR
229bn expiring. The rise in demand at the 28day
tender (up EUR 17.6bn) did not offset the EUR
33.4bn drop at the MRO. As a result, liquidity
provided by open market operations declined further
and now stands at EUR 620.5bn, slightly more than
EUR 50bn above average needs for the current
reserve maintenance period. This is particularly low,
especially at the early stage of the reserve period.
Indeed, reserve requirements (EUR 214.3bn for the
current reserve maintenance period from 14 July to
10 August) are calculated as an average during the
period. Usually, banks put significantly more in their
current accounts at the ECB than this average at the
start of the period, in order to be ahead of the
required level. This allows banks to lower the level of
reserves gradually during the period and therefore
avoid the risk of having to find cash at the end of the
period, which would fuel severe upward pressures on
rates. For many months, liquidity was ample enough
to allow banks to put more than EUR 100bn in
excess reserves at the start of the period while
keeping excess liquidity above EUR 100bn in the
market. In that context, eonias were stuck to lows
and immune from any upward pressures.
Eonias to rise further
As liquidity is now only EUR 50bn above needs,
banks are unable to put significantly more than
required in their current accounts. According to the
ECB, current account holdings were at EUR 240bn
the first day of the period, i.e. EUR 26bn above the
average level. Such level of excess reserves is quite
low compared to the levels seen for many months
Source: BNP Paribas
Chart 2: Eonias are Pushing Closer to the Refi
Source: BNP Paribas
(above EUR 100bn). And this reduces the available
excess liquidity in the market to below EUR 25bn. At
this level, it is impossible to see eonia easing to the
levels prevailing at the start of recent reserve
periods. The 0.444% for the first day is 10bp above
the level the same day of the previous period.
Moreover, the situation is far from being
homogeneous. It is clear that fewer banks have stillcomfortable
levels of excess liquidity and are putting
far more than required in their accounts, while an
increasing number of banks are probably short of
cash. This means that tensions on eonias will not
ease during the current period, and could even gain
momentum: the upward trend for eonias is now
established. This is far from being priced in by
forwards for the end of the year, with ECB November
and December meetings at 0.70% and 0.73%
respectively.
Strategy: Keep paying interest on eonias for the
November and December ECB meetings.
Patrick Jacq 16 July 2010
Market Mover, Non-Objective Research Section
28
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