Market Mover - BNP PARIBAS - Investment Services India

EUR: Demand for ECB’s Liquidity Still High
• Demand at this week’s MRO was significant
given the existing level of excess liquidity.
Recent limited tensions on OIS/BOR spreads
could partly explain such behaviour.
• As concerns over sovereign debt and
liquidity should moderate in the coming weeks,
we expect OIS/BOR spreads to tighten back
slightly, preventing demand for safety from
gaining momentum.
• STRATEGY: Play a tactical compression of
OIS/BOR spreads. Receive the 3mth OIS/BOR
spread (first ER contract).
Chart 1: Higher Demand Leads to Lower Eonias
Demand for 1-week liquidity has increased
Demand for liquidity at recent ECB MROs has
increased significantly. The amount allotted this week
was EUR 76.1bn, up 20.3bn from last week and the
second-highest level of demand since September
2009 (before the last two 1y tenders). The number of
bidders increased only slightly, implying a reasonable
rise in average demand from each bidder. Such an
increase in demand could, at first sight, appear
surprising given the existing level of excess liquidity
in the eurosystem. The ECB is providing the
eurosystem with EUR 745bn, thanks to EUR 712bn
via open market operations and EUR 33bn of
covered bond purchases. There is therefore no need
to rush for ECB liquidity. Note that two tenders (3mth
and 6mth) were expiring this week for a total amount
of EUR 22.5bn. So, on balance, liquidity stands at
the same level after this week’s operations. A
stabilisation of demand at the MRO, implying a
moderate decrease of excess liquidity after the two
tenders’ expiry, could have been expected. The fact
that banks increased demand at the MRO, ahead of
the expiry of both the 3 and 6mth tenders, means
that the need for ECB liquidity remains elevated at
some banks, which remain unable to gain access to
the liquidity in the market.
Such robust demand at ECB operations, as well as
concerns over liquidity conditions in the current
environment of a deterioration of some sovereign
debts, fuelled a slight decline in OIS rates while
Euribors stopped declining. As a result, OIS/BOR
spreads were paid further recently, adding a rise of
Euribor rates to the decline in Eonias. While the
OIS/BOR spread extension was not a matter of
concern as long as it was driven by lower Eonias, it
could be a concern when it is spurred by climbing
Euribors.
Source: BNP Paribas
Chart 2: OIS/BOR Spreads to Tighten
Source: BNP Paribas
Things should calm down
We do not expect an extension of the recent moves
on Euribor rates. As concerns over sovereign debt
gradually moderate, we see room for a modest
decline in rates. At the same time, we doubt demand
at upcoming ECB MROs will continue to climb. Only
one LTRO will mature in coming weeks and the
amount maturing is very small (EUR 2.1bn).
Moreover, there will be a 3mth tender providing
liquidity by the end of the month, which will allow
banks to roll their position. A return of demand closer
to EUR 55-60bn at upcoming MROs can be
expected, leading to a slight decline in excess
liquidity. This is likely to favour some compression in
OIS/BOR spreads in coming weeks. A return closer
to 25bp on the OIS/BOR IMM1 can be expected.
Strategy: Receive the 3mth OIS/BOR spread (IMM1)
with a target at 25bp.
Patrick Jacq 12 February 2010
Market Mover, Non-Objective Research Section
21
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