Much like we saw in Spain last week, the yield on short term paper in Italy has shown a marked improvement versus the last auction. Via BBC:
- The government raised 9bn euros ($11.8bn, £7.56bn) in short-term debt at half its previous interest rate. The interest on the six-month bills was 3.251%, down from 6.504% at the last similar auction in November.
Do we point to the LTRO for this success? [Dec 20, 2011: LTRO - a New Acronym to Learn] It seems the answer is "sort of". We learned yesterday that European banks took a ton of the money they borrowed from the European Central Bank at 1% and…. sent it back to the ECB to earn 0.25%! (sometimes return OF capital is far more important than return ON capital)
- The European Central Bank said overnight deposits from the region’s financial institutions increased to an all-time high. Euro-area banks parked 452 billion euros ($591 billion) with the Frankfurt-based ECB yesterday, the most since the euro’s introduction in 1999 and up from the previous record of 412 billion euros a day earlier.
- The ECB last week lent 523 banks a record 489 billion euros for three years to keep credit flowing to the 17-nation euro economy during the sovereign debt crisis. It lent the money at its benchmark rate of 1 percent. Banks are depositing excess cash back with the ECB at the overnight rate of 0.25 percent, incurring a loss rather than lending it at a better rate.
- Barclays Capital estimates the three-year loans injected 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. Since the three-year loans started on Dec. 22, overnight deposits have jumped by 187 billion euros, suggesting banks are parking almost all the additional liquidity back with the ECB.
But we seem to have a psychological effect occurring, much like quantitative easing in the U.S. Rather than this huge carry trade we were speculating about last week, the idea that others may be engaging in this carry trade may be enough to cause increased demand for this paper. Whatever the case, it has created an effect as seen by the big drops in rates. With that said ten year yields in Italy – while improving modestly today – are still hovering in the 7% range. So it shall be interesting to see how auctions go on debt that is over 3 years in duration – some of those I believe are coming down the pike later this week in Italy.
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