* Italy daily repo volumes at highest since 2006
* Negative rates in German, French repo boon for Italy
* Stabler peripheral markets also helping Spain repo
By Emelia Sithole-Matarise
LONDON, Feb 18 Daily volumes in short-term
borrowing using Italian government bonds is at its highest since
before the financial crisis, reflecting recovery in parts of
euro zone money markets.
According to data from repo index provider RepoFunds,
volumes in the Italian repo market reached 69 billion euros on
Friday, the highest since 2006 -- before the start of the global
financial crisis the following year.
The RepoFunds index was launched in December by interdealer
brokers ICAP and electronic trading platform MTS, and is based
on electronically-executed repo trades that use a bond, bill or
floating rate note issued by the relevant sovereign.
Activity in the Italian market has picked up since the
European Central Bank unveiled its yet to be tested bond buying
scheme last September and lifted investor confidence that the
region can contain its three-year-old debt crisis.
The Italian repo market is also benefiting from investors
looking for a return on their cash as it offers some return
compared with near to below zero rates in the German or French
repo markets, analysts said.
Chris Clark, an analyst with ICAP, said Italian bonds had
been popular as collateral since the ECB outlined its bond
purchase programme in September.
"Lending out short-dated cash against Italian collateral has
been benefiting a good deal from German and French rates being
negative...You can get a bit of interest rate and it's a very
mature and liquid government bond market so you can move in and
out of your positions easily," he said.
The RepoFunds rate on Italian bonds was at 0.010
percent at Friday's fixing, compared with -0.026 percent for
German bonds and -0.013 percent for France.
The cost of borrowing using French and German government
bonds has been driven back below zero since data last week
showed the euro zone economy slipped deeper than expected into
recession in the fourth quarter, reviving speculation the ECB
would cut its deposit rate.
Money markets had all but priced out a cut in the rate the
ECB charges banks to deposit cash at its overnight facility to
negative territory but its vice-president, Vitor Constancio,
said on Thursday such a move was "a possibility" though no
decision had been taken.
The hunt for yield has also seen activity in the Spanish
repo market pick up, according to traders, though figures on
volumes were not readily available.
Reduced fears of a euro zone break-up has also seen Spanish
bond yields tumble from unsustainable levels, enabling the
country to keep funding itself.
"We're not seeing trading in long-term but in short-term
where foreign counterparties are interested again and are
opening lines to trade Spanish and Italian repo. It's easier to
sell Spanish paper in the repo market than before," one money
repo trader said.