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ECB Deposit Facility Usage Declines Nominally, Still At Nosebleed Levels
Following yesterday's surge to an all time record high of EUR 452 billion, which confirmed that virtually all LTRO cash had been redposited back at the ECB to lose 75 bps as per the "inverse carry trade" first presented here, today's update shows that yesterday the cash held by banks at the ECB declined by EUR 15 billion to EUR 437 billion - a delta of just over the amount raised by Italy in its 6 month and Zero Coupon bond issues yesterday. And despite said successful auctions, today the Italian 10 Year BTP is once again over the critical 7% benchmark level, even as Italy prepares to issue between 8 and 11 billion in 3 and 10 Year bonds - an auction which will prove far more challenging as it falls outside the LTRO maturity date and thus leaves banks exposed to non-carry trade covered risk.
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So, fresh ECB-Fiat goes directly into bonds? Mission accomplished.
Fast forward to Jan, 5th, please ;-)
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I told you... ECB repo until the needed usage showes up...
who's left?
Because Draghi and Monty are on the stage this time this doesnt sound 2 stuppid.
Wanted: Dead horse. Will trade for dead cow or 3 dead dogs. Ask for Ben at 1-800-TheFed.
When the Fed did its backdoor (and still ongoing) "liquidity injection" into the US banking system in 2008-09, it flooded the system via the swipe of keyboards with fresh FRNs which came literally out of nowhere, and then were promptly redeposited back at the Fed to gather .25% in the form of excess reserve deposits. Free money, and a wholly positive "carry."
The ECB's version is to lend out Euros at 1%, the monies are deposited back at the ECB to earn the same .25%, and thus results in negative carry.
What am I missing?
As European commerical bank deposit outflows reach all time highs coupled with the decline in the euro, I would expect these banks to keep large balances with the ECB. I would also expect these commercial banks to then purchase short term european sovereign debt which as we all know have high yields. A 3 year italian bond yields 5.6% and the ECB 3 year loan is at 1%. Italian Debt is sufficient collateral for Reverse Repos/ Repos with the ECB. Todays Italian auction went pleasantly well, who the hell is buying this shit?? these commerical banks! The central bank deposits will continue to decrease as each govt. auction hits slowly pulling the govt. yields down. Great strategy on paper but will it keep them afloat after the 3 years is up? Probably not. The 2nd LTRO issuance will be on Feb. 29th. Expect another large injection if Italian yields have not come down.
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