Tuesday 16 June 2009

Europe's own shadow bank: the ECB

The ECB loves working in the shadow. While voices raise to audit the FED, nobody ever mentions the ECB. Well let’s tell you a story. Repo auctions with somewhat longer maturity dates than what is common (two weeks) are coming.
As there are: 1 year.
And one of such auctions is coming up the coming weeks.
We know already the rate 1%.
Meaning: banks can offload eligible paper and in exchange you receive money for one year at a fixed rate of 1%.
Nice.
We hear in the market that there is a huge interest from the banks. Amounts of 500/600 bln EUR are whispered.

Did you also mention that prices of long term govvies in Europe are holding up much better last couple of weeks than their American equivalent?
And did you also mention that the swap rates where lower than the yields on those government bonds?

So, what are banks doing? They go out to by government bonds, swap them to a shorter time frame and will finance them at 1% during one year. This is called: easy money in the bank.

Thank you ECB.
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