German bond yields were pinned at record lows on Thursday before the European Central Bank’s second handout to banks of long-term loans that could reinforce bets for more aggressive stimulus.
Italian and Spanish yields were slightly up at 2.07 percent and 1.88 percent respectively as a sell-off in Greek bonds paused.
Greece’s political troubles and worries over the global growth outlook as oil slumped helped demand for safe-haven Bunds, though the main market focus has turned to the ECB’s tender, a key plank in its plans to expand its balance sheet by up to 1 trilion euros to jumpstart euro zone growth.
Banks are expected to take up only 130 billion euros of the ECB’s so-called TLTROs, according to the consensus in a Reuters poll of traders.
While that would be well above the 82.6 billion euros they took at the first tender in September, it would still mean banks will only borrow just over half the amount being offered by the ECB.
This would be insufficient to offset the 287.2 billion euros of outstanding crisis three-year loans banks have to repay by February, crimping the ECB’s balance sheet expansion ambitions and reinforcing bets for sovereign bond quantitative easing.
German 10-year yields, the yardstick for euro zone borrowing costs, were 1.3 bps down at 0.67 percent, near a record low of 0.666 percent hit on Wednesday. Yields on other higher-rated bonds were lower by a similar amount before the results of the ECB tender at 1015 GMT.
“Today’s TLTRO demand will be short of what remains to be repaid on the 3-year LTROs which means that by the end of February liquidity is likely to decline in the euro zone,» said Patrick Jacq, a strategist at BNP Paribas. «Clearly this is likely to be a further argument in favour of QE.”
Rabobank strategists said a take-up of 50 billion euros below market consensus could increase pressure on the ECB and likely see expectations of a QE announcement shift to January from March.
ECB prospects were helping to curb rises in peripheral bond yields triggered by new political upheaval in Greece after Prime Minister Antonis Samaras brought forward a presidential vote, a risky gambit that could end up bringing the leftist Syriza party to power.
Greece’s short-term debt yields remained well above longer-term ones as investors remained fearful the country could be pushed back towards default.
Rabobank strategists said they continued to favour a fall in peripheral euro zone bond yield premiums over German benchmarks «although noise from Greece does provide a complicating factor here».