ECB Fails To Sterilize Bond Purchases For Second Time In A Month

Back in November 2011, when the ECB failed to fully sterilize its weekly outstanding amount of bond purchases under its now defunct SMP program (replaced with the even more impotent OMT non-existent "bond buying" program), it caused a plunge in the Euro and sent European stocks reeling over fears what this may mean for European bank liquidity. This happened just as Europe was "turmoiling" and the ECB announced the flooding of the European banking system with hundreds of billions in excess liquidity via the collateral-soaking LTRO 1 and 2. A few hours ago, the very same thing happened after the ECB found only 109 bidders for today's weekly attempt to sterilize €184 billion in outstanding SMP holdings, and instead got bids for only €152.3 billion of the total leading to a €32 billion shortfall. This happened just a month after another failed ECB sterilization on November 26. The market barely noticed.

Why the completely muted response? Perhaps because it some ways it was expected, since as a result of accelerated LTRO repayments in recent weeks, excess cash in the Eurosystem is now at the lowest level in just about two years, which also means that banks are seen as preferring to hold on to money. In fact, according to IFR, excess liquidity is expected to drop from today's €171.5 billion to below €150 billion by year end and banks will naturally hold on to dear cash for window dressing purposes and for anything out of the ordinary.

Furthermore, earlier today the Eonia spread (June vs Feb forwards) turned the most negative in months, and certainly since the ECB's announcement of its refi rate cut in early November.

So if sterilization failures are also added to the New Normal, why should the ECB even pretend to be a prudent sterilizer of monetized bonds? If indeed the European liquidity is so low that finding €184 billion in the system becomes a problem, is this a harbinger that very soon the ECB will proceed with unsterilized monetizations, and is today merely a market test to see how risk responds to the second sterilization failure in a month.

Of course, if indeed that is the case, and Draghi is preparing to launch unsterilized monetizations, then suddenly Asmussen's recent departure makes far more sense.