German government bonds are opening moderately lower Tuesday as focus turns to the ECB’s second 3-year LTRO tomorrow. Estimates for the 3-year LTRO remain mixed. Some banks have raised estimates, given ECB’s extension of eligible collateral in non-marketable asset category, but some banks also have lowered their estimates as the haircuts on the additional collateral are seen as more punitive and the price doesn’t seem as attractive as inaugural 3-yr tender in Dec. That said, this is the last 3-year LTRO planned so far and last opportunity for the market to get funds at a price cheaper than the market. However, the demand for the 3-yr LTRO is seen distorted by expiring 3-mth (E38.6bln) & 6-month (E49.4bln) LTRO’s, with ECB also seen conducting a new 3-mth operation. The market median estimate is E470bln. Also mixed is the likely market interpretation of the results, but the general market view is that a strong take-up implies banks are overfunding and using the LTRO to fund carry trades, therefore risk-on. However, some suggest that the risk-on trade may have run its course & large number to trigger profit-taking.
EasyForexNews Research Team