By Marius Zaharia and Emelia Sithole-Matarise
LONDON Feb 4 German Bund yields hit their
lowest level in six months on Tuesday on talk the European
Central Bank was seeking support to stop sterilising its
crisis-era bond purchases in money markets.
The ECB takes an amount equivalent to its holdings of euro
zone government bonds as weekly deposits from banks to offset
the buying and neutralise any threat it will fuel inflation.
The weekly operations are also aimed at quelling concerns
the bond purchases were directly financing governments,
something the ECB is not allowed to do.
A Bloomberg report, citing two euro-area central bank
officials familiar with the debate, said ECB President Mario
Draghi would only consider ending the sterilisation if he is
openly backed by the Bundesbank.
"There's talk Draghi is looking for German support for
ending sterilisation. For me, that's effectively QE
(quantitative easing)," a trader said. QE is market jargon for
central bank asset purchases as a monetary policy easing tool.
German 10-year Bund yields, the euro zone
benchmark, were last 1 basis point lower on the day at 1.54
percent, having earlier fallen to 1.534 percent, their lowest
level since late July 2013.
The ECB successfully sterilised the 175.5 billion euro in
bond purchases it was aiming for on Tuesday, which could lead to
another squeeze in excess cash in the system..
This is in contrast to recent weeks when it failed to
sterilise the entire amount with traders saying banks preferred
to hold on to the funds rather than hand them back to the ECB.
That was because excess liquidity - the amount
of cash banks have beyond what they need for their day-by-day
operations - hovered around two-year lows.
It was last at 170 billion euros, slightly higher than the
low of 125 billion hit in January, but well below highs of over
800 billion hit in mid-2012 after the ECB injected more than 1
trillion euros in three-year crisis loans - LTROs - into the
The drop in excess liquidity led to increased volatility in
overnight bank-to-bank borrowing rates in January as some banks,
less reliant on ECB funds, had to be more active in money
Draghi said an "unwarranted" rise in money market rates
would prompt the ECB to ease monetary policy further.
If the ECB stopped sterilising, the excess liquidity in the
banking system would rise by almost 180 billion euros.
It would keep money market rates anchored at low levels,
preventing a tightening of market conditions that could hamper
the euro zone economic recovery, analysts said.
Some in the market said the ECB might suspend the
sterilisation instead of stopping the programme altogether,
which would achieve the same result of boosting liquidity in the
"If the ECB were to follow that path and go for a suspension
and not termination, it's a pragmatic way to add liquidity to
the system rather than introduce a new three-year LTRO
(Long-Term Refinancing Operation)," said Marius Daheim, a
strategist at Bayerische Landesbank.
"That may be a bit more difficult for the ECB to manoeuvre
in the current setting where banks are repaying LTROs. We don't
think there will be very strong demand for another LTRO."