GBL Euro-Bund futures curve

[Martinghoul]

Are there specific channels how the ECB decision will move the spread or just heightened volatility that can throw things in disarray?

My guesses would be:
QE programme change: both CTD's are about same issue size, with yields comfortably above depo rate, both non-benchmarks - so roughly same performance whatever the outcome?
Rate cut: same performance for cash bonds, but front contract outperforms (6 cents for a 25bps cut?) cus lower funding costs decrease the forward price (and thus the bund futures price), and with longer "holding" horizon the forward drop is larger for the back contract.

That said, I see a cut as very unlikely. Do nothing or taper the monthly volumes but extend the purchases past march 2017 seem more likely to me. Changing capital key seems slightly less likely, and no way they would lose face with a taper but without a sweetener.

Ha, it's definitely a bit more complicated than this...

For instance, if they allow purchases below the depo rate floor, it could mean a lot of shorter-dated bonds becoming available, which means they have to buy less long-dated paper. This could mean a steepening, which would make the back contract cheaper. On the other hand, it could also mean German repo becomes even more expensive, which may have the opposite effect. If they allow deviations from the capital key, it could mean a general cheapening of German bonds. If they decide to subtly suggest that quantity of purchases is an aspirational goal, rather than something to adhere to strictly, it could mean a broad selloff across all EUR sovereigns. If they relax the issue limits for all non-CAC bonds, bunds shouldn't be affected, broadly, but there could be some really funky basket effects. So you get the idea...

TBH, I have sorta given up trying to understand all the possible permutations. I think there are too many, the outcomes are hard to guess and the decisions are likely to be based on legal considerations, rather than economics.

 

[Eurokopek]

Could you pls explain the ECB repo rumours from this week? The Reuters article didn't clear everything for me. Okay, there is shortage of german bonds, so 1) it reduces amount of collateral in the system and thus lending volumes, 2) makes shorting bunds more expensive. I am not sure how lending out those bonds alleviates #1 though.

I imagine parking money with Bundesbank to borrow a bund only makes sense if I am an intermediary and can find someone willing to lend me money below the rate I lent it to the bundesbank and wants bunds only, because else I'd pay my depo rate and be (un)happy. Why would anyone want to lend out cash at below depo rate just to borrow bunds for any other reason than shorting?

The passage from the article hints that it's pension funds, but why lend money to get bunds when you could just use cash as collateral? If amount of collateral is cash+bunds swapping cash for bunds doesn't address the shortage of collateral.

This is putting a strain on investors as they face increasingly frequent demands to put up cash or liquid collateral against their derivative positions due to new regulation.

"If a pension fund can’t borrow a bond in time, it may have to sell its own cash bond, foregoing a potential return in the future to fulfill a short-term obligation," Godfried DeVidts of the International Capital Market Association industry body said.

http://www.reuters.com/article/us-ecb-policy-bonds-exclusive-idUSKBN13I0YF


My alternative understanding is that someone is unhappy about not being able to use periphery or corporate bonds as collateral, so they want to borrow bunds (that they will then use for borrowing in the markets) from the Bundesbank and give the Bundesbank the inferior bonds. In this case the Bundesbank will take risks of holding the periphery/corporate bonds since the private sector does not want them as collateral (or some funny regulation prohibits that?). In this understanding pension funds don't hold enough assets that can be used as collateral for margins (is it for receiving fixed for ALM?), so they want someone to take some credit risk and lend them safe assets in exchange for riskier ones?

 

[Martinghoul]

A repo facility won't change the overall amounts of collateral in the system. The main problem they are trying to fix is the velocity of circulation.

And yes, effectively, it's all about the shorts, but these shorts come from all sorts of sources. For instance, a dealer who sells Schatz futures is going to be implicitly short into delivery.

As to why pension funds want bunds rather than cash, it's because, normally, pension funds aren't really in the business of sitting on cash. But most importantly, there are clearly members of the community who attach great value to sitting on piles of actual German bonds in their vaults, rather than EUR cash. I am sure you understand why they might feel this way at the moment. This tips the balance and creates the squeeze.

And no, it isn't really directly about the periphs, but in some way it's all part of the same conundrum, because of the haircuts.