Bloomberg: Collateral Scarcity Fears Resurface in Europe With ECB Waiver Set to End

There are early indications traders are gearing up for another period of bond scarcity in Europe that risks blunting the impact of monetary tightening.

Concern is mounting the European Central Bank won’t extend a waiver on a 0% remuneration cap for government deposits that expires on April 30. That could drive some of the €390 billion of cash held by national Treasuries into higher-yielding money markets, where safe securities such as government bonds are used as collateral, pushing down rates.

Strategists at Societe Generale, Bank of America Corp. and Commerzbank AG say traders may already be preparing for that eventuality and hedging their risk. The premium investors are willing to pay for German two-year bonds over equivalent swaps increased in January for the first time in four months, bucking a broader trend in repo markets.

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