There had been a lot of focus on the 2021 three-day “turn” from as early as November, in particular with concerns about the prospect of a collateral shortage. The key considerations were: positioning, with a substantive short base in sovereign debt in the anticipation of higher yields; the amount of bonds swallowed up in the ECB Public Sector Purchase Programme (PSPP) and Pandemic Emergency Purchase Programme (PEPP); an abundance of euro cash in the system, which was becoming ever cheaper through the USD-swap, and the usual concerns of reduced bank balance sheets and limited capacity for intermediation.
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It was the periphery segment that seems to have caught the market off guard. Participants report that liquidity became very patchy leading up to year-end, but few expected a sudden tightening of more than 100bp to previously implied rates. Italian GC averaged -3.37% in the interbank market, with specifics averaging -4.19%. Some specials were reported trading as low as -5%. Meanwhile, Spanish GC averaged -3.41% and specifics -5.02%, with some reported prints for specials as tight as -10%, albeit in small size.
The article in the ICMA Q1 2022 quarterly report is available at https://www.icmagroup.org/assets/documents/ICMA-Quarterly-Report-First-Quarter-2022.pdf