German debt hasn’t been this appealing relative to cash in years, the latest sign a collateral shortage that dogged the region’s money markets is easing.
(Bloomberg) — German debt hasn’t been this appealing relative to cash in years, the latest sign a collateral shortage that dogged the region’s money markets is easing.
Traders now stand to pocket 9 basis points over the risk-free rate to part with their cash and borrow the securities, the most since 2015, according to RepoFunds Rates Benchmark data from CME Group.
That’s a far cry from a punitive 10 basis points they would have had to pay on average to execute the same transaction last year.
The repricing comes amid an overall decline in the urgency to bet on tightening in the euro area — and along with it, the need to acquire German paper. The notes — which were in short supply — underpin a myriad of trades across the region’s rates markets and the trend is set to continue despite an uptick in rate-hike wagers ahead of the ECB’s latest decision on Thursday.
“Repo is becoming an increasingly attractive place for institutional investors to place excess cash,” said Arne Petimezas, an analyst at AFS Group in the Netherlands. He suggests repo rates may rise further relative to risk-free rates, “which will attract even more cash inflows.”
Years of European Central Bank bond purchases exacerbated a shortage of high-quality liquid assets in Europe, which are systemically important owing to their use as collateral and to satisfy financial regulations. German debt is particularly sought after because it’s deemed the safest in the region.
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