PREVIEW: ECB TLTRO III Repayment Amount Publication at 11:05GMT/06:05ET

Expectations

• A survey via Bloomberg has a forecast range of EUR 200bln to 1.5tln, with a median expectation of EUR 600bln. Within this, the likes of ING forecast EUR 400bln, SEB expected EUR 400-500bln


• Further out, the survey expects EUR 285bln to be repaid during the December window; across the first two windows (i.e. November and December) Pictet’s Ducrozet expects EUR 1.2tln in total. Additionally, Ducrozet posits that anything below EUR 500bln for the November window may be seen as a disappointment to the hawks within the ECB.

Background

• At the October 27th gathering the ECB altered the interest rate applied to the TLTRO, an alteration that comes into play from 23rd November. The rate applied to such loans will now be at least the existing level of the deposit rate facility, i.e. 1.50%. As a reminder, the interest rate applicable to TLTRO.III remains at a maximum of -1.0% until the alteration comes into effect after November 22nd. At present, around EUR 2.1tln of outstanding reserves are yet to be repaid by banks. Note, in terms of the rate applied from then onwards the ECB’s language is that it will be indexed to average applicable key ECB interest rates from that date onward, thus 1.50% is the lowest possible rate given the ECB’s three main rates are 1.50%, 2.00% and 2.25% for the deposit, refi and lending respectively.


• At the October gathering, the ECB said this alteration was to “ensure consistency with broader monetary policy normalisation process” and would “help address unexpected and extraordinary inflation increases by reinforcing transmission of policy rates to bank lending conditions”.


• To facilitate the alterations, the ECB announced three additional windows for the TLTRO repayments, the deadline to inform the ECB of their intention to use the first window was November 16th (announcement on the size due today, November 18th).

ECB Commentary

• Commentary has been somewhat limited, including from Lagarde most recently, with the most pertinent remark stemming from de Guindos who said the repayment will be “sizeable”; though, he offered no details on what magnitude would constitute a sizeable repayment.

Potential Reaction

• SEB surmises three potential effects to expect from the repayments.


• One, they will contribute to a cheapening of EGBs vs swaps given some of the loans have been channelled to gov’t bond purchases, which will be liquidated on repayment.


• Two, given it is conceivable that the carry trade outlined above to gov’t bonds has been particularly popular within the periphery and as such repayment will be most keenly felt there, potentially lifting spreads vs core counterparts.


• Three, a reduction in excess liquidity will exert modest upside pressure on Euribor.


• Note, ING writes that given the overall excess reserves are at EUR 4.7tln, today’s reduction if it is in-fitting with estimates and towards the lower-end as many desks expect will likely only have a marginal impact.

Future schedule

• The three additional voluntary repayment dates are November 23rd, January 25th and February 22nd. Full schedule available here.

18 Nov 2022 - 09:50- Fixed IncomeData- Source: Newsquawk