ECB’s Bond-Lending Program Seen Not Solving Collateral Shortage

The European Central Bank’s bond-lending program will do little to improve the shortage of government securities that firms are able to use for collateral, according to Barclays Plc and JPMorgan Chase & Co.

The ECB’s quantitative-easing program, which it’s using to purchase 60 billion euros ($64 billion) of debt each month, is causing a liquidity crunch. It’s being exacerbated by some investors saying they’re unwilling to sell certain securities which they need to meet regulatory requirements and for short-term financing needs.

The ECB has made some securities available for lending to support bond- and repurchase-market liquidity. The cost of borrowing securities in the repo market has climbed. Repo rates can become “deeply negative” as the ECB’s lending rates are more expensive than general collateral rates, according to HSBC Holdings Plc.

The aim of the lending program “is to alleviate the collateral squeeze, but what we view as the punitive spread over GC rates and borrowing limits will hardly make the policy effective,” HSBC analysts including London-based head of rates research Bert Lourenco wrote in an April 13 note.

Repurchase agreements, or repos, are transactions used for short-term funding and typically involve the exchange of government debt for cash and the subsequent repurchase of the same or a similar security.

Liquidity in the German bund market is under threat amid a contraction in the repo market, wrote analysts at JPMorgan led by Nikolaos Panigirtzoglou in London. This is likely to worsen this year amid QE purchases and lower issuance by the German government.

“Strong demand for high-quality collateral induced by regulation and aggressive buying by the ECB in a context of low net supply of bonds should push core GC rates well below the deposit facility rate, which in our view will not be a floor for rates,” Barclays strategist Giuseppe Maraffino wrote April 13 in a note.

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