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.
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