Citi See ECB Remuneration Step as Negative Excess Liquidity Shock

Following the ECB step yesterday to lower the remuneration ceiling on government deposits, Citi write:

• They see the sharp cheapening response in the Schatz spread as a negative excess liquidity shock. The market reaction was sharp, suggesting that markets were possibly pricing a return to 0% remuneration and a plunge in ECB government deposits.
• As such, the ECB announcement corresponds to a negative excess liquidity shock for € cash bonds. Going forward, the >€600bn of TLTROs maturing between March and June are already in the price of swap spreads, and yesterday’s market reaction has probably shaved off the premium associated to the ECB driving excess liquidity higher by up to €350bn as a result of remunerating government deposits at 0%.
• From here, the outlook on the pace of QT represents the key catalyst for swap spreads and, as such, they still believe that Bund vs 6s should converge towards the mid-40s in the next few months.