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German yields fall on talk Draghi wants to stop sterilisation
February 4, 2014 / 1:05 PM / 4 years ago

German yields fall on talk Draghi wants to stop sterilisation

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, Feb 4 (Reuters) - 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 banking system.

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 markets.

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 system.

“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.”

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