Forget EURIBOR And Basis-Swaps; EUREPO Curve Inversion Signals Major European Funding Stress

Tyler Durden's picture


It would appear that one-by-one the open-market indications of stress in European funding markets are manipulated to the point of worthlessness. As the provision of unsecured lending is for all intent and purpose finished in Europe, LIBOR is a mirage and even cross-currency basis-swaps (though modestly margined) have lost their 'signal' as MRO/LTRO reduced the term-funding need. However, as recently highlighted by @SoberLook, the EUREPO curve - which measures how much banks have to pay to borrow, when pledging or repo-ing assets, for loans - is not only un-manipulated as of yet but is flashing very bright warning signals that all is absolutely not well in European bank liquidity. The 'signal' that is clear is the inversion of this curve, which means simply that it is significantly more expensive to repo (borrow) in the ultra-short-term than for a much longer-term. This is likely due to the banks' need to fund deposit outflows, thus requiring the banks to 'find' that cash (by 'lending' their assets as security for the loan). The loss from the counterparty bank seizing your collateral if it went broke is far higher over a longer-period and thus there is a very strong preference to only repo overnight relative to 3 months, for instance. This repo curve inversion signals a total lack of trust among European banks (in even the shortest of tenor), no belief in short-term 'bailout effects' lasting more than weeks,  as well as a huge demand for cash (repo) that suggests deposit outflows remain very active.

The following charts shows the gradual inversion of the EUREPO curve from its 'normal' upward-sloping levels of 3/28 to its massively inverted shape currently...


...and over time it is clear that the shortest-end of the repo curve (overnight lending - solid green) has become - in the last few weeks - the most in demand relative to the rest of the short-end of the curve (1 month repo - dashed green).

While these levels are indeed indicative of funding stress they are not at 'catastrophe' levels yet though the acceleration of the inversion is very worrisome...

And as a reminder EURIBOR (unsecured lending) is a fallacy and the levels are simply not real (providing no stress signal)...

...and USD term funding needs (via the EUR-USD cross-currency basis swap market) has been 'mitigated/manipulated' by Fed swap lines and LTRO/MRO (making it worthless as a signal of stress unless it begins to seriously crash again)...

...though mid-term basis-swaps (post LTRO) show some signal, it is the short-term liquidity needs of banks that is the concern and the EUREPO curve is where to look for any signs of further stress or easing (especially when considering the +/-5% swings in stock prices among European banks currently).

Charts: Bloomberg

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Tue, 06/19/2012 - 23:37 | 2541909 phungus_mungus
phungus_mungus's picture

Not even aliens can explain this bullshit...

Wed, 06/20/2012 - 00:00 | 2541988 world_debt_slave
Wed, 06/20/2012 - 00:13 | 2542020 Tijuana Donkey Show
Tijuana Donkey Show's picture

Illegal or space?

Wed, 06/20/2012 - 01:02 | 2542106 xtop23
xtop23's picture

Why worry they'll all be rating themselves AAA soon. Moody's, Egan, et al be damned.

That should solve everything.

Tue, 06/19/2012 - 23:45 | 2541922 BlackGoldTexasTea
BlackGoldTexasTea's picture

Maybe Zombie Apocalypse is actually referring to all the zombie banks finally failing.

Tue, 06/19/2012 - 23:38 | 2541924 Tirpitz
Tirpitz's picture

Refinancing drying up? L E H M A N letters written in bold type all over the wall? Can't be, five years after the banks have learned their lesson(s)...

Tue, 06/19/2012 - 23:45 | 2541945 Go Tribe
Go Tribe's picture

Please cut back on all the doomsday headlines. Just tell me when to load my gun and get the kids inside, just that one headline.

Tue, 06/19/2012 - 23:48 | 2541953 LongBalls
LongBalls's picture

Time for me to withdraw more cash. I like the European style.

Tue, 06/19/2012 - 23:52 | 2541962 GtownSLV
GtownSLV's picture

None of this is a problem because Spain and Italy are getting bailed out to the tune of 500 billion euros. Really.... at least now we "Know" Itlay needs a bailout...




Wed, 06/20/2012 - 00:02 | 2541990 Tirpitz
Tirpitz's picture

... all the while nobody knows where all that money will be coming from.

Wed, 06/20/2012 - 01:10 | 2542113 earleflorida
earleflorida's picture

private shadow banks surfacing --- trillions to lose if they don't get involved --- no one can hide from this 'tropic-of-cancer' financial depression --- sink or swim for all involved

Wed, 06/20/2012 - 07:50 | 2542467 andrewp111
andrewp111's picture

That is just a temporary kick the can move by Germany to give Ze Germans time to print up New Reichsmarks so they can exit the Euro. Then the Euro will be left to the Italians, Spanish, Portugese, Frogs,  and Greeks, who will be freed to print Euros to infinity and beyond. The Euro will become the Drachma.

Tue, 06/19/2012 - 23:52 | 2541964 long-shorty
long-shorty's picture

the thing that is at 0.17% now that we are all supposed to freak out about was above 1.5% at one point in 2011. I will choose to not freak out (about this particular thing); the situation as a whole is still pretty crappy.

Wed, 06/20/2012 - 00:00 | 2541984 Tirpitz
Tirpitz's picture

The way I see it, it ain't so much about the absolute rates, but rather about the inversion of the rate curve. For the banks, which refinance(d) themselves on the short end, to hand out loans and speculate on the long end, this becomes suicidal. Time to open a bottle...

Tue, 06/19/2012 - 23:58 | 2541977 chump666
chump666's picture

Excellent article ZH

Wed, 06/20/2012 - 00:04 | 2541995 holdbuysell
holdbuysell's picture

Isn't margin interest in brokerage/trading accounts based on LIBOR? Of course, so are other rates.

That buy equities? And other financial instruments?

Just sayin'....

Wed, 06/20/2012 - 00:09 | 2542009 FoodStampPrez
FoodStampPrez's picture

The 10 year UST is at 1.6% and people genuinely believe shit is going to hit the fan here soon...seriously? 

Wed, 06/20/2012 - 00:16 | 2542016 Element
Element's picture

Sorry, I saw your avatar and reflexively hit the red arrow at least half a dozen times before I realised what was happening, very sorry.


BTW, this was interesting:


Wed, 06/20/2012 - 00:09 | 2542012 Arkadaba
Arkadaba's picture

Just watching the news (in Canada) and a brief report on the G20 statement on the Euro crisis: "We support the intention to consider concrete steps ..." WTF? 

Wed, 06/20/2012 - 00:14 | 2542021 Arkadaba
Arkadaba's picture

The language is so lukewarm and vague - trying to figure out the agenda - letting Euroland go down?

Wed, 06/20/2012 - 01:35 | 2542140 sosoome
sosoome's picture

It means they're gonna do something decisive. They just don't know what it is yet.

Wed, 06/20/2012 - 00:28 | 2542039 TruthInSunshine
TruthInSunshine's picture

G20 Joint Statement:


We fully support an attempt to come to an agreement, to implement something that will be a net postive economic catalyst, while also taking into account the relative positions, socially, economically and politically, of each member state represented here, and the limits created by such factors, at some point in the future.


There's nothing they can do and their only attempted solution so far has been to ask German citizens and those of a few other northern european countries to commit economic and fiscal suicide (as well as their future offspring) in order to bail out the financial/banking parasites that are loaded to the gills with the sovereign debt of the PIIGS+U.K.

If Bernanke hadn't kicked the can by throwing trillions into the coffers of the well connected TBTF best friends forever of Geithner and the New York Branch of the Federal Reserve, and had instead let the forest fire clear the scrub, taking the diseased portions of the economy out, there'd be fertile, rich soil by now from which real, genuine and sustainable economic activity (the kind that creates many jobs and well paying jobs) would have taken root.

Wed, 06/20/2012 - 00:45 | 2542070 Arkadaba
Arkadaba's picture

Yep! I agree there is nothing they can do.

But am wondering about the timing of the G20 admitting they can't do shit.  First time the PTB have even hinted that they don't have all the magic cards.

Wed, 06/20/2012 - 00:10 | 2542013 BlandJoe24
BlandJoe24's picture

Thanks Tyler.  Do you have a link so we can keep checking on an updated EUREPO curve chart?

Wed, 06/20/2012 - 07:08 | 2542403 mspgrandi
mspgrandi's picture

Well if you havent Bloomberg is a bit tricky.

Anyway, I like the rationale of Tyler explanation, however just checked historical levels for the EUREPO curve on Bloomberg and i can say that this is not a strange situation at all, curve invert and revert fairly frequent and there is nt a clear link with the Euro crisis (i.e CDS levels, or Xccy levels etc.)


So i would not pay too much attention to this. Market is too illiquid to call

Wed, 06/20/2012 - 10:20 | 2543182 BlandJoe24
BlandJoe24's picture

thanks for doing the research and sharing your findings

Wed, 06/20/2012 - 00:22 | 2542029 chump666
chump666's picture

Asia is pricing out QE3, Yen. Thoughts?

Wed, 06/20/2012 - 00:29 | 2542043 LongBalls
LongBalls's picture

QE will not happen.

Wed, 06/20/2012 - 00:46 | 2542072 chump666
chump666's picture

That's the play.

Wed, 06/20/2012 - 01:00 | 2542099 Dr. Engali
Dr. Engali's picture

There will be no QE until August at the earliest.

Wed, 06/20/2012 - 01:18 | 2542124 realbg
realbg's picture

How do you explain the REDUCED stress level in the long-end EUREPO? 

What reason is there for EUREPO to DROP from over 0.17% on March 28 to  0.09% on June 19?

I agree inversion signals high demand for short-term repo market, but maybe we are focusing too narrowly?

Wed, 06/20/2012 - 06:10 | 2542353 slewie the pi-rat
slewie the pi-rat's picture

the bear shit in the woods?

ZIRP means zirp

this is very narrow and tyler says as much:  prob ain't nuttin, honey

when marioECB announces his zombie bankstering plan, perhaps he will preface it with:  take as long as you need; we can just take a partial bank holiday...

b/c he would want to prevent a deepening crisis and prevent irreversible systemic damage aka a TBTF fails

this isn't a game;   it is a real house of cards  L0L!!!

Wed, 06/20/2012 - 03:38 | 2542264 Alejandrito
Alejandrito's picture

There are many signs of tensions in the euro area. The interbank market closed to many countries, tensions in debt issues in Spain, Greece, Italy, even France.

But the most striking is the perception of citizenship that is not the same one euro in Spain that a euro in Germany, just look at this chart:

Wed, 06/20/2012 - 04:27 | 2542313 Tic tock
Tic tock's picture

2 cents;, Fed announces mini-QE, Friday night announces Gold reserves will be re-valued, Wednesday announces move to Gold-backed collateral requirement.

Wed, 06/20/2012 - 05:52 | 2542347 alfanaught
alfanaught's picture

Interestingly, I got this mail minutes ago from ING Belgium:

Vous quittez l'Europe pendant vos vacances ?

Dans ce cas, souvenez-vous qu'il n'est plus possible d'utiliser Maestro en dehors de l'Europe (vous trouverezicila liste des pays où Maestro est encore accepté). Pour pouvoir utiliser Maestro partout dans le monde, vous devez demander une autorisation exceptionnelle auprès de votre agence. Pour cela, convenez d'un rendez-vous
Pour vos paiements et achats en Europe, rien ne change : vous effectuez ces paiements comme vous en avez l'habitude, c'est-à-dire simplement et en toute sécurité.   Nous vous souhaitons d'ores et déjà d'excellentes vacances,

Avec nos sincères salutations,  

Inge Ampe
Directeur du Marketing

Rough Translation:

During your holidays Maestro is only available in a restricted list of European Countries. Should you wish to use your Maestro Card outside of these countries you have to ask special authorisation in your bank agency

Capital controls anyone?

Wed, 06/20/2012 - 06:53 | 2542389 falak pema
falak pema's picture

you mean you wouldn't trust him with your wife for one night at the Copacabana, let alone a three month stint, when you are absent???


Speedy Gonzales is the trade name of all bankstas on a liquidity spree!

Never remove your finger from there, even to scratch your nose....

Wed, 06/20/2012 - 08:04 | 2542490 TrainWreck1
TrainWreck1's picture

The life of Eurepo man is always intense.

Tue, 06/26/2012 - 04:06 | 2560719 Anonym
Anonym's picture

Erm, this article makes no sense whatsoever.  Firstly, Eurepo rates are meaningless in a world where every specific type of collateral has a life of its own.  Secondly, the Eurepo fixing was meaningless even during the best of times, since people don't really trade very long-dated term repos and never have.  Thirdly, the interpretation of the repo rate in the article is flawed.  Finally, the EONIA curve is also inverted and all of these curves aren't signalling any sort of stress (EURIBOR/EONIA, which is a proper stress indicator, is near all-time lows).  What they're signalling is a pricing of an ECB depo rate cut.  


All this stuff is pretty basic and it's rather shocking to see articles that are full of such ignorance and bias.

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