LONDON: Two-year German yields hit a three-month high on Friday as banks repaid the highest weekly amount since February to the European Central Bank, getting into shape for an upcoming balance sheet review.
Banks will repay a massive 22.65 billion euros of crisis loans early to the ECB next week, as the pace with which banks pay back the three-year loans they got from the central bank at the height of the crisis picks up.
The ECB will examine the euro zone's top lenders in an asset quality review (AQR) before it takes over responsibility as their supervisor from November next year, and banks are sprucing up their books in anticipation.
Against this backdrop, short-term money-market rates have risen in recent weeks, feeding into higher two-year German yields.
Overnight Eonia lending rates rose above 0.14 percent this week double levels seen only a month ago.
"It underscores this trend of declining excess liquidity, which looks to continue," said Christoph Rieger, rate strategist at Commerzbank.
"Banks are keen to hold less inventory and thus need less financing, especially over this AQR reporting date.
It's unlikely that the ECB will step in, even though tensions have clearly been on the rise, but I don't think they will step in before year-end."
Two-year German yields hit their highest since Sept 11 at 0.246 before retreating slightly to end the session at 0.23 percent. They still underperformed the rest of the curve.
Ten-year yields were 2 basis points lower at 1.83 percent with Bund futures up 15 ticks to settle at 140.25 with the market supported by US data showing inflation remained tame.
FED NERVES
Although the economic numbers gave some in the market hope the Fed might not reduce its bond purchases at its policy meeting next week, investors remained on edge over the possibility of the central bank cutting the scheme.
The market has been nervous since a breakthrough budget deal that avoids a US government shutdown in January easily passed the US House of Representatives on Thursday, a step some analysts said removed an obstacle to the Fed tapering its monetary stimulus.
"The market was gradually positioned for a risk of tapering so I would trade the market from the long side looking for a rally on the back of the FOMC if they don't taper," said Patrick Jacq, a strategist at BNP Paribas.
Slovenian bonds outperformed their peers as they continued the previous day's rally, which began after a stress test showed the country's banks needed 4.8 billion euros to stay afloat.
The government said it could raise the funds without seeking a euro zone bailout, reassuring investors.
Ten-year Slovenian yields were 11 basis points lower at 5.34 percent, but price moves tend to be exaggerated by thin liquidity in the tiny market.
"All in all, the stress test results show manageable recap and transfer costs, reducing the risk of Slovenia requesting a bailout programme," UniCredit said in a research note.
Comments
Comments are closed for this article.