Danske Research Team
Danske Bank A/S
There are no penalties attached to the TLTRO borrowing that prevent banks from using the funding for government bond carry trades. This should be positive for banks’ willingness to take on the TLTRO.
Although it is possible to use the funds for carry trades, it is much less attractive to do so today compared to when the LTROs were introduced. This could reduce banks’ demand for the liquidity, but from a funding perspective the TLTROs are still very attractive and should reduce banks’ costs.
We have for some time been arguing that adopting a negative deposit rate would be a game changer in the rate markets and create a ‘hot potato’ effect – this is confirmed in market behaviour since the deposit rate was cut to -0.10%.
We have yet to see the big increase in liquidity from the TLTROs but evidence shows improved liquidity conditions in the euro system. Eonia has consequently fixed lower in the corridor than our previous estimated relationship to excess liquidity would suggest.
Furthermore, other parts of the fixed income sphere confirm this picture with the impressive rally in peripheral bonds as the best evidence.
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