The Frankfurt-based ECB said cheap TLTRO-program loans that may reach as much as 1 trillion euros ($1.36 trillion) must be used to finance household and business lending. The challenge is to prevent banks from piling into sovereign-debt markets and extending a rally in euro-area peripheral bonds. Such a strategy will not be as profitable as it was when the bank first provided liquidity in 2011, ECB President Mario Draghi said.
“It’s not the ECB’s intention but at the moment the TLTROs do look like providing favorable funding for banks,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “It will be difficult to prevent carry trades,” he said, referring to banks borrowing the ECB’s cheap cash and using that to invest in higher -yielding euro-area bonds.
Banks will be able to take up the loans from September at the ECB’s main refinancing rate plus 0.1 percentage point. If the benchmark remains at a record-low 0.15 percent, the borrowing cost will be just 25 basis points. Banks must meet guidelines on lending or else hand the money back in 2016.
The yield on Spain’s 10-year (GDBR10) bond fell six basis points, or 0.06 percentage point, to 2.72 percent at 4:18 p.m. London time, having dropped to a record 2.542 percent on June 10. The 3.8 percent bond due in April 2024 rose 0.50, or 5 euros per 1,000-euro face amount, to 109.19.
Rates on similar-maturity Italian debt slid two basis points to 2.85 percent.
“The convenience to use the ECB cheap money to buy government bonds is much less” than in a previous funding round, which started in December 2011, Draghi said in testimony to the European Parliament in Strasbourg, France, yesterday. “The general situation is such that these carry trades are going to be much less profitable.”
The additional yield Spanish 10-year government bonds offer over their German counterparts was 1.50 percentage points today, having declined from more than 600 basis points since Draghi pledged in July 2012 to do “whatever it takes” to save the euro. The spread contraction means further narrowing is likely to be limited and banks will be forced to lend, according to Steven Major, HSBC Holdings Plc’s global head of fixed-income research in London.
“There’s an effective put option because banks could take the money and put it back into sovereign bonds,” Major told Caroline Hyde on Bloomberg Television’s “Countdown” program today. “The spreads have already been compressed. Banks are not going to do the same trade in the same size, so they better find something else to do with it.”
Financial institutions will take up more than 700 billion euros and will increase credit to the real economy over the four-year span of the program, according to economists polled in a monthly Bloomberg News survey.
Draghi “is trying to rein in expectations to some extent and also defend the ECB’s credibility,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Banks will not pay too much attention to the rhetoric of the ECB regarding the TLTROs, they will just look at the conditions and see if they can put their money to work.”
Germany’s 10-year (GSPG10YR) bund yield was about four basis points from its lowest in 14 months after a gauge of investor confidence in the nation fell more than economists predicted, adding to speculation euro-area interest rates will stay low.
The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, dropped to 27.1 from 29.8 in June. Economists forecast a decrease to 28.2, according to the median of 36 estimates in a Bloomberg News survey. The gauge has fallen every month since reaching a seven-year high in December.
Benchmark 10-year yields were little changed at 1.21 percent. The rate fell to 1.17 percent last week, the lowest level since May 2013.
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