ECB Eases Collateral Rules to Alleviate Government Bond Shortage

(Bloomberg) -- The European Central Bank is moving to ease a shortage of government bonds in the euro area that traders say has been exacerbated by its unconventional monetary policies.

In a bid to help meet demand for the securities, the ECB said it doubled the amount of cash it would accept as collateral from banks looking borrow sovereign debt to 150 billion euros ($170 billion), according to a briefing posted on its website on Monday.

Recourse to safe government debt is an integral part a well-functioning financial system. But the ECB’s 1.85 trillion-euro bond buying program, unleashed to help the economy weather the pandemic, means traders have had to compete with the central bank for a limited amount of paper.

Meanwhile, its liquidity injections have boosted the amount of spare cash in the euro area to record just shy of 4.5 trillion euros, underpinning demand for debt while driving borrowing costs to record lows.

“It was overdue,” said Christoph Rieger, the head of fixed-rate strategy at Commerzbank AG. “It underlines that the authorities are on the case, and not deaf to the market complaints.”

The decision comes as strategists at Citigroup Inc. estimate that virtually all of this year’s bond sales with maturities of 30- to 50-years will be completed by the end of this week, underscoring the dearth of higher-yielding debt available.

The squeeze pushed the spread between two-year German bonds and equivalent swap rates to the widest in 18 months last week. Short-term funding rates fell to an all-time low as traders clamored to get hold of collateral before year-end. 

There are signs the decision is already filtering through to markets. German two-year swap spreads slumped the most since March 2020 on Monday, before paring some of the move on Tuesday.

“More stability in this area will feed into other assets,” wrote Mizuho International Plc. strategists including head of multi-asset strategy Peter Chatwell.

Meanwhile, three-month Euribor has risen 1.5 basis points after falling a record-low of minus 0.573% at the start of the month.

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