Bloomberg: Traders Seek ECB Action on Collateral Squeeze Warping Market

  • Market participants tout Fed-style secured facility, ECB bills
  • Government bond drought means ECB policy can’t ripple through

Five trillion euros of liquidity is eroding the bridge between European interest-rate policy and borrowing costs in money markets, spurring debate over the kind of toolkit needed to stop the dislocation warping the cost of funding in the wider economy.

In normal times, tighter policy at the European Central Bank would be expected to lift money-market rates in tandem, ultimately raising the cost of borrowing more broadly and helping cool inflation. But so-called collateral scarcity — or a shortage of bonds in the market after years of central bank debt purchases — means demand is soaring for the limited pool of notes available.

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