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Banks, Financial

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Categorized | Banks

Eurozone bond yields jump on ECB repo market reports

Posted on November 23, 2016

Eurozone government bond yields have been given a kick higher this morning on reports the European Central Bank is considering making changes to its lending requirements for banks in a bid to alleviate stress in the short-term funding markets.

Germany’s 10-year Bund yield has climbed 2.7 basis points (0.027 percentage points) today to 0.256 per cent, after Reuters reported the ECB is planning on easing up its collateral rules that allow commercial banks to borrow from the central bank.

France’s equivalent maturity bonds have climbed 7.5 basis points at publication time (yields rise when a bond’s price falls).

According to the report which quotes unnamed sources, policymakers want to make it easier for banks to use the vast quantities of government debt held by the ECB as collateral in short-term lending operations.

Europe’s QE programme has been creating distortions in the market for short-term funding for some time, resulting in sharp moves in overnight rates for repurchase agreements, or “repos”.

Large-scale government bond purchases by the ECB, which first kicked off in March 2015, have reduced the availability of assets favoured for repos, which are used as collateral by banks and institutions to raise loans.

The ECB has already tried to ease the problem by introducing a new securities lending programme, and since September the German Bundesbank has been making the bonds it buys under QE available for repo. However the loans are available only in exchange for other German debt and are limited to one week.

Market participants say the problems are related to the scarcity of collateral but also the way in which the Bundesbank lending programme has been arranged.

“The facilities have never been designed in a way that allows enough participation for tensions in the repo markets to ease significantly”, said Frederik Ducrozet at Pictet, adding:

They may increase the size of the facilities and ease the terms and conditions in order to increase participation. But either way, this would be a technical adjustment to deal with scarcity issues and market tensions, nothing to do with the broader policy stance.

Reuters reported the issue will be discussed at the ECB’s December 8 meeting.