WSJ on Repo in Europe
The Wall Street Journal writes "Overnight Rates Hit New Lows in Europe." It explains, "Over the past week, the cost of borrowing cash overnight using German and French securities as collateral has turned deeply negative, reaching new record lows, according to data by RepoFunds Rate. It all has to do with European banks trying to make their books look better. To borrow large amounts of short-term cash safely, investors often use repurchase agreements, or repos, which involve selling a security and pledging to buy it back at a slightly different price in the near future. This difference between both prices -- the repo rate -- acts as the interest rate on the loan." The Journal continues, "The overnight interest rate that the European Central Bank steers directly is the unsecured interbank rate -- called Eonia -- but German and French repo rates usually hover not far below it. Two weeks ago, Eonia was at minus 0.354%, with the German and French repo rates at minus 0.686% and minus 0.618%. Now, Eonia is at the same level but rates on secure money-market borrowing using German and French collateral have plunged to minus 1.93% and minus 1.126%, respectively. Investors were already getting paid to borrow because of the ECB's negative-rate policy, but now they are getting paid huge amounts. The reason is that many players in the repo market are desperate to lend, chiefly all the money-market funds that lend their cash to banks in exchange for, say, German sovereign bonds. That's much safer than putting money in deposit accounts at the same bank. On the other side, banks have inventories of bonds because they buy them from clients who want to sell. They are happy to hand them to money-market funds in exchange for cash. Indeed, that's often how they find cash to pay for the purchases in the first place. Banks have been cutting down on the size of their inventories, and at year's end they slash them even more. This is because they need to report the size of their balance sheet to European regulators so they can calculate their liquidity coverage ratios. These ratios impose capital costs on how much balance sheets expand, so banks are eager to minimize them. According to Fitch Ratings Inc., European money-fund managers have been sweating to find somebody to take their money since December started."
