MARKET MOVER - BNP PARIBAS - Investment Services India

ECB Upcoming Tenders: How Much?
• EUR 225bn is expiring next week and there
is good reason to think that liquidity will drop
from current levels.
• However, the sources of demand at tenders
that expire next week point to significant roll,
especially on the 3mth the ECB will conduct.
• STRATEGY: Enter ER1-ER5 steepening
position.
Chart 1: Large Expiry Ahead
1y MRO
6m
3m
35.67
1m
19.08
131.93 23.17
153.77
37.90
96.94
A very large expiry
EUR 225bn is maturing next week: EUR 75.2bn from
the second 1y tender the ECB carried out last year,
EUR 17.9bn from the 6mth tender conducted in
March and EUR 131.9bn from the 3mth tender
conducted at the end of June. It is worth noting that
the 3mth tender was conducted at the end of June
and allowed banks to roll a significant part of the
amount expiring from the first 1y tender
(EUR442.2bn). The total amount expiring is very
large and the current level of liquidity (EUR 591bn
provided through the MRO and LTROs) is exposed
to a decent decrease. However, looking at the source
of demand at old tenders that expire next week, it
seems that a large amount will be rolled.
What can be expected for demand?
A large part of the answer lies in the source of
demand at the tenders that expire next week. The
EUR 75.2bn 1y tender conducted in September 2009
did not attract arbitrage as the 12mth eonia at that
time was 0.69%, well below the refi rate. Demand
therefore came largely from banks with little access
to the market for long-term liquidity. It is reasonable
to think that at least EUR 50bn will be rolled of the
EUR 75.2bn expiring. When it comes to the EUR
17.9bn from the 6mth tender (conducted at the start
of April), it is interesting to note that liquidity provided
in April 2010 with LTROs by the Bank of Greece to
banks based in Greece increased by EUR 18bn. It is
crystal clear that the EUR 17.9bn is in Greece and
there is a good chance of seeing Greek banks rolling
almost all the amount expiring. Finally, the bulk of
next week’s expiry (EUR 131.9bn) comes from the
3mth tender the ECB conducted on 1 July, the day of
the expiry of the famous EUR 442.2bn tender. At that
time, liquidity fell sharply as arbitrage disappeared,
and demand for the 3mth came when the 3mth
Euribor was at 0.78% and the 3mth eonia at 0.47%.
Once again, it is worth noting that despite the fall in
liquidity, the level of liquidity provided by the Bank of
Greece in July thanks to the LTRO was unchanged
17.88
Maturity (days)
75.24
-20 0 20 40 60 80 100 120
Source: BNP Paribas
from June. This means that Greek banks rolled the
expiry of the 1y with the 3mth. LTROs in Ireland fell
almost EUR 20bn in July from June after increasing
by EUR 40bn in June 2009, suggesting that demand
from Irish banks at the 3mth tender in July was a
floor. Given the level of the 3mth Euribor and the
3mth eonia starting on 30 September, respectively
0.90% and 0.54%, it makes sense to see relatively
firm demand as the cost of ECB liquidity is relatively
cheaper than it was three months ago. Against this
backdrop, we see a very large roll of the 3mth expiry,
well above EUR 100bn. As a result, we expect total
demand at next week’s tenders of around EUR
190bn. Two ECB tenders will offer banks the
opportunity to be allotted. The ECB will conduct a
fine-tuning, short-term 6day tender to allow banks to
find liquidity until the next MRO. Given the evolution
of demand at the MRO over many weeks, it appears
that demand for short-term liquidity is roughly stable
in the EUR 150-155bn area. Needs for short-term
liquidity are unlikely to increase next week and we
therefore expect the 6day tender will attract only
moderate demand. Demand at the 3mth will
therefore be very strong.
As a result, with no change in demand at the MRO,
we expect demand for next week’s 3mth tender could
be in the EUR 165bn area and demand at the 6day
close to EUR 25bn. This would lead to a EUR 35bn
drop in liquidity. Given the current level of excess
liquidity, just below EUR 100bn, a drop of EUR 35bn
should not lead to significant upward pressures on
short-term rates. Moreover, the extension of nonstandard
procedures for open market operations
means that there is no rush for very short-term
liquidity. Eonia should remain close to current lows.
This may favour limited resteepening pressures
beyond the 3mth area.
Strategy: Enter ER1-ER5 steepening position.
Patrick Jacq 23 September 2010
Market Mover, Non-Objective Research Section
26
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