/STIR: BofA On ECB Balance Sheet Expectations & Favoured STIR Trades

Bank of America forecast the “ECB balance sheet to fall from €6.8trn at end-2023 to €6.2trn by end-2024 and €5.6trn by end-2025.”

• They note that “the outcome of the operational framework review is now likely to be concluded by the end of Spring, according to President Lagarde. The review may introduce new lending operations to help banks satiate their reserve demand as the central bank continues to wind down its balance sheet. This is a source of upside risk to our balance sheet forecasts where the ECB would be offsetting the reduction in its quantitative easing (QE) portfolio with loans. There are also risks of any such operations being introduced too late or proving unattractive to banks to use.”
• The like to be “paid April ECB (€str) vs March to tactically fade early rate cuts given the pushback from central banks, including the ECB. We also like September 2024 forward rate agreement (FRA)-€str wideners to position for increased funding pressures and to hedge against a risk-off event.”