UPDATE: ECB TLTRO-II Won’t Spur More EGB Carry Trades: Analysts
(Bloomberg) -- (Adds Bloomberg survey result, views from UniCredit, HSBC and RBS) Additional borrowings by banks at ECB’s new-format TLTRO this month may be capped given the abundance of liquidity already in the system, analysts say.
- Any impact on euro-area bonds may be muted, particularly in the near-term, they say
- The first TLTRO-II auction will take place on June 23 and the result is due the next day -- the same day the outcome of the U.K. referendum on EU membership will be announced; analysts expect net additional borrowing of EU50b (low estimate minus EU40b, high estimate EU150b), according to a Bloomberg survey
- NOTE: Banks will repay TLTRO-I loans on June 29, according to an ECB statement
- Pictet Wealth Management
- Expect a relatively high gross take-up for the first operation, up to around EU450b, including extra net demand between EU50b and EU100b, economist Frederik Ducrozet writes
- The incentives look strong, and smaller peripheral banks that are still facing higher funding costs (or no access to wholesale funding at all) may be willing to take it as a safety net too
- On the other hand, banks don’t need the cash with excess liquidity getting close to EU900b and it may not always be worth being tied to ECB liquidity for a potential gain of just 40bps
- The possibility of a U.K. vote to leave EU at the June 23 referendum could spur a higher number
- Citigroup
- Doubt the effectiveness of the program can be gaged based on the size of the take-up, even though a large number would be useful from a balance-sheet perspective as it helps to curtail euro appreciation
- Anticipate additional take-up of EU115b
- BNP
- Even if net demand isn’t very strong, reasonably expect a take-up close to EU400b
- That won’t raise the level of excess liquidity significantly further, but the maturity of liquidity will lengthen sharply to almost 4 years from 2.2 years
- While liquidity provided by TLTRO II isn’t TLAC- eligible, it will be a good substitute for other TLAC- ineligible funding, such as covered bonds; so demand for 3-yr to 4-yr loans may decline, leading to receiving interest on 3 or 4y fixed swap rates; as a result, 4y OIS/BOR spreads may tighten in coming months
- Continue to recommend receiving 4Y OIS/BOR spread 1Y forward, targeting 22bps
- Barclays
- Revises expectations of the total gross take-up at the June TLTRO II to EU400b from EU420b, while keeping forecast of net borrowing unchanged at about EU30b
- Given the abundant liquidity conditions, any additional funding from the TLTRO shouldn’t have a significant effect on money-market rates, which Barclays expects to remain low and close to the ECB deposit rate
- Any market impact is likely to be in terms of market confidence in the banking sector and the economic outlook, as good participation could be seen positively in terms of lower cost of funding for banks and potential improvement of lending to the real economy
- RBS
- Expect banks to ask for EU450b at the first TLTRO-II, including EU380b rolled from TLTRO-I and EU70b in new money, mostly to be used to replace maturing debt
- TLTRO-II use for carry trades and new lending to start slowly and pick up in later operations
- Operation may still have a significant impact; expect EU570b of fresh liquidity across the four operations
- Commerzbank
- Take-up may provide an important indication of whether the ECB’s strategy is working or whether additional steps could be needed later this year, analysts Christoph Rieger and Juliane Rack write in client note
- Wouldn’t be surprised by a negative net allotment, which could raise concerns that the central bank’s measures aren’t working; unlikely there would be a major market impact amid the U.K.’s EU referendum-related volatility on that day
- Alongside the asset purchases, the TLTRO-II will further skew the supply/demand imbalance especially in covered bonds, leading to further scarcity with liquidity becoming a challenge for more names
- While carry opportunities are hardly compelling, still believe that peripheral sovereigns could benefit in coming months from higher demand as peripheral banks that are engaging in liability management exercises park their cash in govt bonds
- HSBC
- Anticipate a total of around EU25b-EU75b of new liquidity being drawn in the four TLTRO II operations running until March 2017, some of which may find its way into government bonds
- Given TLTRO-II costing is tied to rates at the onset of the liquidity program, banks may hold back new borrowing if they believe ECB could cut policy rates although recent ECB commentary may diminish any holding-back intent
- Peripheral banks to benefit from a likely cheapening of ECB liquidity and some new pockets of carry trades developing on the Spanish and Italian curves
- MORE
- BofAML
- See EU75b-EU125b of new funds to be taken and expect total TLTRO funds outstanding following the June operation (across both the TLTRO I and II) to be EU500b to EU550b
- JPMorgan
- Given the optionality of paying a cheaper rate, JPMorgan was originally expecting a repayment close to the full amount
- However, taking the repayment into consideration and under the assumption that about EU50b of extra liquidity will be borrowed at the TLTRO-II, now estimate an uptake of about EU420b at the first auction
- UniCredit
- Liquidity already high and banks will only bid for any if they have plans on how to use it; there’s no incentive to front-load demand
- One factor that could boost demand is Brexit fear, as banks submit bids the day before the vote; could spur precautionary demand to refinance expiring debt, particularly after recent market volatility
- Redemptions of bank bonds due between June 20 and Sept. 20 amount to around EU50b, rising to EU60b to EU70b in the following three months
- The higher the TLTRO-II demand this week, the better it will be for risky assets: more liquidity means potentially more loans and more support for financial assets and signals the ECB’s measures have been well received
- UBS
- An effect of QE has been a large-scale creation of deposits in euro-area banks and while TLTRO I took place before QE was announced, banks have been unable to repay it until now, Justin Knight writes in client report
- In core countries, many have been burdened with large excess liquidity leading to a drag on net-interest margins
- Any concept of a major carry trade taking place in peripheral markets would be misplaced
- SocGen
- The TLTRO-I repayment is in line with SocGen’s expectations, Anatoli Annenkov writes in e-mailed comments
- Expect a net take-up of TLTRO-II funding of around EU150b in 2016, which would allocate equally over the three auctions, according to an earlier client note
- In June, could see a relatively large gross take-up of the TLTRO II, of around EU430b
- While this should provide funding security, we doubt it will materially increase credit to the corporate sector
- MORE: Sell the 2y2y/4y1y area of EUR vol grid vs cheaper 5y tails, SocGen said Friday
- Rabobank
- Reports that the net take-up is anticipated to be only in the “few” tens of billions fits with Rabobank’s own thinking that it will be in the EU50b-100b range, likely to be biased toward the first two operations, analysts write in research note
- While ECB says the main gauge of the operations’ effectiveness will be improving funding conditions rather than just the volume of take-up, the latter does matter for the govt bond market, with the small net take-up indicating there won’t be a rush into EGBs as was seen with the original two VLTROs in 2011/2012
- The repayment suggests that all of that will be flipped into TLTRO-II in June, which is ~EU50b less than total current outstanding under TLTRO-I and suggests TLTRO-II uptake will disappoint
- That said, EU50b is a bit of a drop in the ocean when around EU85b of excess liquidity is being pumped in by the ECB via QE every month
- Pavilion
- Easier consumer-credit conditions and an improved outlook for consumer spending in peripheral countries should add a further boost to companies’ sales, strategists write in note
- And European firms have significant capacity to increase dividends and share buybacks with ECB’s corporate-bond purchase plan and TLTRO removing a significant headwind in this regard
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anatoli Annenkov (Societe Generale SA)
Christoph Rieger (Commerzbank AG)
Frederik Ducrozet (Pictet Asset Management SA)
Juliane Rack (Commerzbank AG)
Justin Knight (UBS Global Asset Management Japan Ltd)
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