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Euro zone yields rise mostly on tame ECB TLTRO, Fed outlook
September 18, 2014 / 4:57 PM / 3 years ago

Euro zone yields rise mostly on tame ECB TLTRO, Fed outlook

* First ECB loan injection falls well below forecast

* Yields briefly dip as investors see need for new measures

* Excess liquidity to hinge on 3-year LTRO repayment

* Fed rate forecasts, U.S. jobless claims weigh on bonds (Recasts with rise in most euro zone bond yields, fresh comments)

By Emelia Sithole-Matarise and John Geddie

LONDON, Sept 18 (Reuters) - Euro zone bond yields mostly rose on Thursday after a small take-up by banks of the ECB’s new cheap long-term loans and projections by the U.S. Federal Reserve of steeper rate rises in coming years.

The ECB said it would provide 82.6 billion euros of new long-term loans to banks (TLTROs), much less than the 133 billion euros predicted by money managers in a Reuters poll.

Many expected some of the cash to be re-invested in government bonds, particularly peripheral debt which still offers higher yields than the debt of core euro zone peers after a two-year rally spurred by the ECB’s monetary stimulus.

Yields on top-rated bonds led the charge higher in see-saw trade as investors tried to assess whether the tepid response to the ECB’s long-term loans could encourage the central bank eventually to embark on a full-blown asset purchase scheme.

The U.S. Fed’s forecasts on Wednesday of higher-than-expected rates for loans among banks in 2015 and 2016 and data showing a sharp fall in the number of Americans filing new claims for unemployment benefits last week, also weighed on top-rated paper.

German 10-year yields, the benchmark for euro zone borrowing costs, were 4 basis points higher at 1.04 percent. Other core bond yields were up by a similar amount.

“Having such a low figure at the TLTRO today is disappointing and not supportive for the market. The FOMC was also hawkish yesterday (with their rate forecasts),” said Cyril Regnat, fixed income strategist at Natixis in Paris.

While the low demand for the ECB loans raised doubts about a stimulus package the ECB had hoped would stave off deflation and revive the economy, many analysts said it was too early to reach conclusions about the effectiveness of the latest measures.


Many banks expect greater demand for the next round of TLTROs, in December, as banks become more confident after the results of stress tests due next month. Banks may also have held fire to await more details of the ECB’s scheme to buy asset-backed securities and covered bonds.

“We caution against jumping to the conclusion that today’s outturn on its own implies further monetary policy support from the ECB, beyond that which is already forthcoming,” RBC strategists said in a note.

“But it does suggest that any reticence from the Governing Council to commit to a large-scale asset purchase programme next month will be viewed as disappointing by the market.”

Lower-rated euro zone bond yields fell to the day’s lows after the ECB announcement before bouncing higher.

Spanish 10-year bonds were the best performers, with their yield ending the day 2 bps lower at 2.28 percent. They had fallen as low as 5 bps earlier to 2.25 percent as fears eased that a vote for Scottish independence in Thursday’s referendum would encourage Spain’s own Catalan separatists. The latest polls put Scotland’s unionists a whisker in front.

That bodes well for Spain, which sold 3.5 billion euros of a new three-year bonds at record low yields on Thursday.

For money markets, the focus will now turn to the latest repayments of three-year ECB loans, handed out at the height of the crisis in late 2011 and early 2012. Those payments are due on Friday.

As long as repayments remain below the new loan injections, excess liquidity should increase in the weeks ahead, pushing down euro overnight interbank rates (EONIA).

Overnight EONIA has crept back into positive territory in recent days, even though the ECB cut its deposit rate to minus 20 basis points at its last meeting. This has been due to a decline in excess liquidity of nearly 100 billion euros.

Commerzbank said even a small injection of net liquidity could render levels of minus 8 bps realistic. (Editing by Hugh Lawson)

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