“Monumental” uptake of ECB LTRO but carry-trade impact unlikely

According to a recent Reuters poll, the median forecast for issuance was €250 billion and the end result was double that. The Bloomberg consensus was €300bn.

RBS states that around 61% of the €489.2 billion figure is recycling of liquidity in the system, with banks shifting maturities from seven-day, three-month and one-year repos into the new three-year LTRO.

The bank estimates that €298.5 billion of the three-year has been rolled from existing or maturing ECB operations, resulting in a net addition to liquidity in the system of around €191 billion.

In comments made before the operation, Rabobank rates strategists said that anything above €300 billion would be an “upside surprise” and above €400 billion would be “monumental”.

However, the key question is how much of this funding will be used for the much-touted sovereign-bond carry trade.

“In a deleveraging world, we doubt this will be used in any meaningful way to buy sovereign bonds,” say the RBS analysts. “Markets are likely to discount any earnings boost coming from this operation as a one off. The operation is thus unlikely to have a long-lasting confidence-boosting impact.”

Where it could have an impact, however, is on the senior bank funding market. “Much of today’s liquidity facility may well be devoted to meeting an imminent spike in bank-debt refinancing,” observe the Rabobank strategists, a point recently emphasized by Euromoney. 

For more, check out ECB's new LTRO threatens the covered bond market