Year-end repo market pricing and liquidity are generally a focus of market attention, with the euro market proving itself particularly vulnerable to significant dislocations in recent years. The 2022 euro “turn” was being discussed as early as the summer, with underlying concerns related to the ongoing situation of excess liquidity in the banking system, scarcity in some collateral (notably German Government bonds), seasonal curbs on repo market making capacity (mainly due to various regulatory reporting requirements), and, a new twist, the ECB moving interest rates higher, taking its deposit rate above zero- percent (which is also the cap for certain reserves held at the central bank). By late September, the implied repo rate for German collateral over the three-day turn was somewhere between ESTR-800 basis points and ESTR- 1,000 basis points,1 prompting many stakeholders to raise concerns publicly as well as with the ECB.
As the [forthcoming end of year review] report will show, pricing over year-end improved significantly in the weeks leading up to the date. On 28 December (the spot date for year-end) German collateral (both general collateral and specific collateral) averaged around ESTR-350 basis points (with some specials trading wider than ESTR-400 basis points), French collateral around ESTR-290 basis points, and Italian collateral around ESTR-195 basis points. Perhaps the biggest surprise was Spanish collateral, which had become trickier to source going into December, and which averaged around ESTR-300 basis points over the turn.
There are several potential factors that helped to contain the extent of the year-end repo market price dislocation. These include the October announcement of the Deutsche Finanzagentur that it would make available on repo an additional €54 billion of German Government bonds, across 18 ISINs, the increase in the ECB’s borrowing facility against cash from €150 billion to €250 billion, and the large repayment of the Targeted Long-Term Refinancing Operation on 21 December (€447.5 billion). In the case of the TLTRO, this did not in itself put much government bond collateral back into the market, but it has helped to reduce the amount of excess liquidity (which has reduced by some £1 trillion since September). The fact that positioning
for year-end began as early as August also needs to be considered.