When 500 billion euros no longer pops eyes
There was a time when 500 billion euros in cash was truly spectacular.
But investors and speculators hoping for an even more eye-popping cash injection at the European Central Bank’s second and most likely last three-year money operation on Wednesday are likely to be disappointed, based on past Reuters polls of expectations.
Ever since the ECB started offering cheap, long-term loans to keep cash flowing through banks during the financial crisis, a clear pattern has emerged in the forecasts of money market traders attempting to gauge their size.
They have consistently underestimated the size of a given new loan tender the first time it is offered, only to overshoot on subsequent operations of the same maturity.
It is already widely understood on many trading desks that Wednesday’s sale, which the ECB is not likely to repeat, is an offer that is too good to refuse rather than a vital lifeline to keep the financial system afloat.
“Free lunch” is a common phrase that money market traders contacted by Reuters have used over the past month when providing views on how big Wednesday’s long-term refinancing offer (LTRO), currently expected to be 500 billion euros, is likely to be.
As early as the first one-year tender the ECB offered in 2009 when the credit crisis was gripping the financial system by the jugular and threatening to bring it crashing down, traders were overwhelmed by the wall of cash that hit them.
Creaky credit markets
It’s not a snap or even a pop – but there’s definitely a crackle. Rumblings emerging from key credit markets bare a frightening resemblance to the early days of the 2008 credit crunch.
Take commercial paper, a widely used instrument for short-term funding in the corporate world. Financial sector issuance of commercial paper fell steadily in the second half of last year, from around $556.5 billion in July to $434.4 brillion in December. The final month of the year saw the downward trend spilling over into other industries.
Paul Ashworth at Capital Economics:
The contraction in commercial paper issued by the financial sector is now being compounded by a dramatic drop off in commercial paper loans to the non-financial sector.
Despite the European Central Bank’s renewed effort to keep bank liquidity ample, money markets have shown some signs of strain. The London Interbank Offer Rate or LIBOR, used for loans between banks, more than doubled in the last six months of the year to its current 0.55 percent as worries mounted about the health of European institutions.
Anthony Crescenzi, portfolio manager at PIMCO:
Liquidity risks by no means have been eliminated because liquidity provisions are no substitute for private capital nor the transference of risk to either the private-sector or the central bank.
For inter-bank rates, this means that while rates might be capped by the cost of borrowing from the Fed and the ECB, no substantial decline in rates is yet likely either until an external balance sheet is drawn into the mix or there is a miraculous endogenous recovery in the wholesale funding market and Europe’s banks therefore regain market access.
Please take my money: The zero-yield bill
Wall Street firms are begging the U.S. Treasury to take their cash, at least judging by the latest auction of short-term Treasury bills. Treasury sold $30 billion of four-week bills at a “high rate” (pause for laugther) of 0.000% on Wednesday, a mix of strong demand for year-end portfolio shuffling but also a reflection of ongoing fears of a credit crunch emanating from Europe.
It was the fourth straight sale in as many weeks that brought a high rate of zero. The zero percent rate means buyers of the debt will receive no interest at all, sacrificing any return simply to hold cash in the safest of investments.
A rise in repo financing costs is “a sign the year-end demand for short, safe assets has begun,” said Roseanne Briggen, our New York-based colleage at IFR Markets, a unit of ThomsonReuters.
The expensive repo financing also reflects the other typical year-end event – lots of accounts unwilling to lend securities. This scenario worsens into the turn of the year, but then is offset by dealers scrambling to finance what’s left on their books over the turn.
Which strengthens the case of those who think the Treasury market will increasingly behave like the notoriously low-yielding market for Japanese government bonds or JGBs.
While demand for short-term U.S. debt remained strong, key euro zone bank-to-bank lending rates fell for the fifth session running on Wednesday, pushed down by a funding glut after banks took almost half a trillion euros at the European Central Bank’s first-ever injection of 3-year cut-price loans.
