ECB Buys Another €4 Billion In Sovereign Debt; Is Another Failed Fixed Term Deposit Operation Coming Up?

Last week, the ECB had a failed QE "sterilization" operation, when it was unable to cover the full €55 billion in previously purchased government debt via a Fixed Term Deposit operation, better known as a liquidity reacharound. That particular auction, which occurs every Tuesday, generated only €31.9 billion in bid side interest, or 0.6x BTC. The failure was largely attributed to the massive LTRO maturity the next day. Which is why everyone will be closely following tomorrow's most recent FTD operation. Even more so, since as the ECB just announced, in the prior weak the central bank bought an additional €4 billion in sovereign bonds as part of the Securities Markets Programme which is now at €59 billion. As the chart below shows, this indicates a steady buying interest of €4 billion per week for each of the past 4 weeks. On the other hand, as we have been expecting for a long time, with total bidding interest declining, while the total FTD amount rising each weak, the likelihood of ongoing failed auctions, and continued loss in European liquidity conference keeps going higher.

Full ECB release:

As announced by the Governing Council on 10 May 2010, the ECB will conduct specific operations in order to re-absorb the liquidity injected through the Securities Markets Programme.

In this regard, the ECB will carry out a quick tender on 06 July at 11.30 in order to collect one-week fixed-term deposits with settlement day on 07 July. A variable rate tender with a maximum bid rate of 1.00% will be applied and the ECB intends to absorb an amount of EUR 59 billion.

The latter corresponds to the size of the Securities Markets Programme, taking into account transactions with settlement at or before Friday 02 July. The benchmark allotment amount in MROs takes into account the liquidity effect of non standard measures, assuming an unchanged size of the Securities Markets Programme and full sterilisation of this amount via the above mentioned liquidity-absorbing operation. Fixed term deposits held with the Eurosystem are eligible as collateral for the Eurosystem's credit operations.

The ECB intends to carry out another liquidity-absorbing operation next week.