As previewed last night ahead of today's fourth and final ECB TLTRO-II operation which took place earlier this morning, a big take up was expected with market consensus expecting €115bn, and some forecasts as high as €300BN. The final number came almost in the middle, with the ECB reporting it had allotted €233.5 billion among 474 bidders, more than double the amount expected.
Following the news, European stocks climbed, led by mining and bank shares, as lenders borrowed more than double what was forecast under the European Central Bank’s TLTRO program.
The Stoxx Europe 600 Index advanced 0.3 percent to 375.21 as of 11:31 a.m. London time, set to end three days of losses. European miners extended their gains to 0.9 percent, following metals prices higher, and the banks sector rose 0.6 percent. Lenders were allotted 233.5 billion euros in final round of Targeted Longer-Term Refinancing Operations, the ECB said.
As we further noted last night, from a rates perspective, what matters is whether these funds will trigger flows into the bond or swap markets as banks set up carry trades. As ABN AMRO noted, carry trades have certainly looked attractive and currently there is a possible spread of around 80bp between the rate on the TLTRO and similar maturity peripheral bonds. However, there is little evidence that banks have used TLTRO-II funds for carry trades over the last few months.
While it remains to be seen if this latest TLTRO will spur further risk on trades, the initial reaction to the far greater than expected take up favorable, sending both risk assets, US equity futures and European bond markets higher.
The final TLTRO result can be summarized as follows:
The ECB announced €233 bn of take-up (by 474 banks) in the fourth and final TLTRO-2 auction. TLTRO-2 is a four-year facility, provided on a full allotment and fixed rate (at 0%) basis. The rate can fall to -0.4%, assuming loan growth targets are met. Three points:
- The take-up was more than double what Wall Street expected (€115 bn expectation vs. €233 bn actual). It is also almost 4x higher vs. the previous high of €62 bn (December 2016 auction).
- Today’s take-up brings total utilisation of the TLTRO-2 facility to €739 bn gross and €329 bn net of TLTRO-1 repayments.
- A stronger take-up was expected, owing to multiple factors (pricing, accounting treatment, loan growth and this being the last auction). €233 bn of incremental liquidity in the system is positive from a sector-resilience perspective.
That said, as Goldman writes in response to the TLTRO announcement, the bank "does not see today’s take-up as having scope to meaningfully change market perception of European bank share prices."
Finally, for those wondering why the dramatic pick up, as Goldman further writes, attractiveness of the facility had improved for four main reasons:
- Pricing: fixed-rate pricing is an attractive structure in a world with an upward rate bias.
- Accounting treatment: multiple banks started to accrue a negative rate on the facility since inception, given the high probability of beating the benchmark. This improved the attractiveness of the facility.
- Loan benchmarks are achievable, as loan growth has shown timid signs of improvement, increasing the probability of surpassing the ECB’s benchmark.
- Last auction: an additional incentive was that there is no “next time”.