ECB liquidity floods euro money market and distorts indicators

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany

A key euro zone interbank money-market rate is trading below the European Central Bank’s own official rate for the first time in over five months, a sign of the vast amount of cash that has been poured into the system to combat the COVID-19 crisis.

The ECB has flooded the system with so much liquidity that the rate at which banks borrow from each other — Euribor — is within a whisker of a record low.

Three-month Euribor EURIBOR3MD= was trading on Wednesday at minus 0.486%, and in what is a rare occurrence – this rate is now below the ECB’s own euro overnight indexed swap (OIS) EUREON3M=, which was trading at minus minus 0.47%.

“The system is so flooded with liquidity that banks are essentially telling you they don’t need the money,” said Peter Chatwell, head of rates at Mizuho.

The situation is very different from late March, when Euribor rose to -0.16% and the spread over OIS was at its widest since the 2012 euro zone debt crisis, a sign of severe stress in the system.

Global policymakers have pumped in more than $20 trillion in stimulus in response to the coronavirus pandemic, and the ECB has massively raised its bond buying scheme and provided vast quantities of cheap loans to banks.

These loans, known as targeted long term refinancing operations (TLTROs), were made easier to access in March this year, possibly resulting in banks borrowing more than they needed and sitting on too much cash, said Antoine Bouvet, a strategist at ING Bank in London.

The ECB was not immediately available for comment.

But Olek Gajowniczek, a trader at Japanese bank Nomura, said that in his view the negative spread won’t prompt a change in the ECB’s policy stance. “Global central banks remain in accommodative mode,” he added.

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