Most eurozone bond yields fell on Thursday after banks made modest bids for the European Central Bank’s second handout of long-term loans, keeping alive bets for more aggressive stimulus measures.
Greek yields bucked the downward trend, with shorter-term yields remaining above longer-term ones on investor concerns that fresh political upheaval could drive Athens towards another default.
The ECB’s tender of the four-year loans is central to its plans to expand its balance sheet by up to 1 trillion euros ($1.25 trillion) to jumpstart eurozone growth.
Banks took up almost 130 billion euros of the TLTROs, which was what traders had expected, bringing the total take-up to 212.4 billion euros, far short of the 400-billion-euro maximum identified for the end of the year.
This is insufficient to offset the 287.2 billion euros of outstanding three-year loans that banks have to repay by February, crimping the ECB’s balance sheet expansion ambitions. These appear unlikely to be met except by sovereign bond buying, the full quantitative easing (QE) option opposed by Germany and some other eurozone states.
German 10-year yields, the yardstick for eurozone borrowing costs, were down 2 basis points at a record low of 0.65 percent, with other top-rated eurozone bond yields creeping towards historic lows.
Italian and Spanish yields fell 3-4 bps to the day’s lows of 2.01 percent and 1.843 percent respectively before retreating slightly as Greece’s political troubles made investors wary of taking more exposure to riskier eurozone debt as year-end looms.
“The size of the TLTRO take-up is not high enough to reduce the likelihood that QE will come,» said Felix Hermann, market strategist at DZ Bank.
“In the end we will see that balance sheet effects will not be sizeable at all and I would expect QE speculation to rise again, especially to the run-up to the January ECB meeting.”
Money market rates slipped before retreating after the ECB tender. Data showing core inflation in France turned negative in November pushed the five-year five-year forward inflation rate, the ECB’s preferred measure of market inflation expectations, towards record lows, compounding market bets for further ECB action.
Rabobank strategists said they still favour a fall in peripheral eurozone bond yield premiums over German benchmarks «although noise from Greece does provide a complicating factor».