The Bank of Italy will seek to ease concern that the European Central Bank’s quantitative-easing purchases will produce a scarcity of securities in the region’s government-bond market as buying enters its third month.
Italy’s central bank said that bonds it has bought as part of the program have been made available for securities lending beginning Monday. The Rome-based institution has a 10 basis-point fixed fee for lending the Italian government bonds it owns, cheaper than the ECB’s 40 basis-point fee.
As part of their efforts to stop liquidity drying up in the region’s debt markets, national central banks begun allowing financial institutions to temporarily exchange bonds they own for those the NCBs bought under QE. Like the 60 billion-euro ($67 billion) purchases the ECB targets monthly, each euro nation is also responsible for its own securities-lending arrangements. The overall program is too fragmented, according to David Hiscock, senior director for market practice and regulatory policy at the International Capital Market Association.
“For the time being the response is inadequate,” Hiscock said. “We are hoping that more can be done to better coordinate and broaden the program of lending so it’s easier for a wider range of market participants to borrow stock back from the ECB on a harmonized and consistent basis.”
The program is aimed at market makers to keep sufficient liquidity, particularly in the repurchase-agreement market. Repos are typically used for short-term funding, with debt provided as collateral for loans. Within the euro-area’s periphery, Italian bonds are the most liquid market and therefore tend to be used for collateral.
The Bank of Italy announcement comes two months after buying began and 15.2 billion euros of the nation’s public debt had already been bought through April. The securities lending service will be provided by Clearstream Banking SA.
The most coveted debt for collateral is AAA rated German securities. The Bundesbank has made bonds it has purchased available for lending through Clearstream and additional channels for lending are still being prepared.
Repo rates have turned negative in Europe as demand is so strong for these bonds, meaning traders are paying another entity to take their cash so that they can own the securities for a limited period.