QE purchases cuase liquidity surplus to reach €400bn next week

The June TLTRO settles on Wednesday, 24 June, which is the settlement day of next week's MRO. A very large part of the TLTRO take-up will represent an injection of new liquidity since the roll from the existing ECB operations is unlikely to be significant this time, contrary to what has happened at the previous operations, says Barclays. 

Indeed, the MRO outstanding is about €90bn (of which Greek banks should account for about €30bn), close to the lowest level from an historical perspective and used mainly for liquidity management rather than for funding. The amount maturing at the June 3m LTRO (settlement on Thursday, 25 June) is very small (€19bn) and broadly stable versus previous operations. Hence, it is likely to be rolled, therefore, the June TLTRO, together with the weekly QE purchases, should bring the liquidity surplus to about €400bn from the current level of €330bn after the settlement of the operation (24 June), according to Barclays' estimation. 

"This would fuel further downward pressure on the Eonia fixing: the fixing should be about -14bp, with some swings around this level depending on the evolution of the volumes in the overnight unsecured market. The 3m Euribor could go towards -2bp, barring a further worsening of the situation in Greece, which could cause an increase in risk aversion, pushing the credit risk component in the money market rates up", states Barclays.

Also, such a liquidity injection should reinforce expectations of quicker liquidity/balance sheet expansion, with liquidity conditions remaining accommodative for a long period. This would support rates even at the long part of the money market curves (up to the 2y/3y area). Since 9 June, it has rallied about 5bp to the current level of -6bp; further, a decline to -10bp is seemed to be possible, where it was before the second round of high volatility in the EGB markets in the first half of June.