Halister News

(Bloomberg) -- Schatz may underperform Eonia given the extreme pricing of German repo in anticipation of two-tiered system if ECB delivers only a 10bp depo cut, HSBC strategist Subhrajit Banerjee writes in client note.

• Exempting TLTRO liquidity based on banks’ lending profiles is a way to soften the impact of deeply negative rates
  • But given the Eonia forward curve, estimate spread of ~15bp is priced between higher and the lower depo rates, and share of excess reserves associated to the latter is likely 80%
• ECB disappointment may result in a higher euro and flattening pressure on the bund curve, more so than OIS
• If the ECB introduces a two-tiered system, Eonia curve can out-steepen the bund curve as the ECB may not want to link 80% of excess reserves to the lower depo rate
• Linking a smaller liquidity share to a lower depo will put upward pressure on Eonia forwards as effective depo will fix higher