Commerzbank: Pressure On The Plumbing

Commerzbank write “as outright rates continue to tread water, the steady increase in €STR fixings is raising eyebrows. We doubt that this reflects excess liquidity.”

• “Instead, the ongoing drag from ever cheaper repos seems crucial.”
• “There is likely more pressure as markets settle into the new post-scarcity regime which is summarised by the fully relaxed repo specialness distribution.”
• “Combined with the remote prospect of a sudden collateral demand shock, this argues for a continued decline in the collateral risk premium, i.e. tighter swap spreads, where we stay short.”
• “At the same time, we doubt that GC/specials will a settle above the depo rate, which also imposes a floor for Schatz-spreads vs. €STR.”
• “Another factor could be the reverse repo auctions by the Spanish DMO, which will start today.”
• “Note that Spain is the country with the largest government deposits at the central bank (€51bn at end-December).”
• “This should accelerate the process of reducing government deposits with the Eurosystem, which are still some €120bn above normal.”
• “The impact on core collateral or uncollateralised cash will be indirect, and it is unclear how large the take-up will be.”
• “Nevertheless, it will provide more short-term funding for collateral, which could at least ease the cheapening pressure on collateral.”