(percentages per annum; daily data)
0.0 0.5 1.0 1.5 2.0 2.5
0.0 0.5 1.0 1.5 2.0 2.5 fixed rate in the main refinancing operations interest rate on the deposit facility overnight interest rate (EONIA) interest rate on the marginal lending facility
June Aug. Oct. Dec. Feb. Apr. June Aug.
2009 2010
Sources: ECB and Reuters.
a maximum bid rate of 1.00%. With those liquidity-absorbing operations, the ECB allotted an amount corresponding to the size of the purchases under the Securities Markets Programme, which totalled €61 billion on 1 September.
Box 3
LIQUIDITY CONDITIONS AND MONETARY POLICY OPERATIONS IN THE PERIOD FROM 12 MAY 2010 TO 10 AUGUST 2010
This box describes the ECB’s liquidity management during the three reserve maintenance periods that ended on 15 June, 13 July and 10 August 2010. Over these periods, the Governing Council responded to the sudden re-intensifi cation of fi nancial market tensions in early May 2010 by reactivating some of the non-standard monetary policy measures that had been phased out shortly before. It also started implementing its Securities Markets Programme (SMP), as announced on 10 May. The regular three-month longer-term refi nancing operations (LTROs) allotted on 26 May and 30 June were again conducted as fi xed rate tender procedures with full allotment, and not as variable rate tenders. In addition, temporary liquidity swap lines with the Federal Reserve System were reactivated in coordination with other central banks, and US dollar liquidity-providing operations at terms of 7 and 84 days were resumed (only one 84-day operation was carried out during the periods under review). On 10 June 2010 the Governing Council announced that a fi xed rate tender procedure with full allotment would be in place for the regular three-month LTROs to be allotted on 28 July, 25 August and 29 September 2010. A non-standard monetary policy measure that ended during the period under review was the covered bond purchase
programme (CBPP). This was completed on 30 June 2010, with the targeted nominal amount of €60 billion having been purchased on the primary and secondary markets over the 12-month life of the programme. The central banks of the Eurosystem intend to keep the purchased covered bonds until maturity.
The fi rst and largest of the three 12-month LTROs conducted in 2009 matured during the period under review, leading to a reduction in the use of the deposit facility.
Liquidity needs of the banking system In the three maintenance periods under review, the banking system’s aggregate daily liquidity needs – defi ned as the sum total of autonomous factors, reserve requirements and excess reserves (i.e. current account holdings in excess of reserve requirements) – averaged
€584.0 billion, which was €20.7 billion more
Chart A Banks’ current account holdings in excess of reserve requirements
(EUR billions; average level in each maintenance period)
0.5 0.8 1.1 1.4 1.7 2.0 2.3 2.6
Aug. Feb. Aug. Feb. Aug. Feb. Aug.
0.5 0.8 1.1 1.4 1.7 2.0 2.3 2.6
2007 2008 2009 2010
Source: ECB.
Monetary and financial developments
than the average level registered in the previous three maintenance periods.
This was mainly due to an increase of
€16.8 billion in the average value of the autonomous factors, which stood at
€369.9 billion. In addition, average reserve requirements rose by €1.5 billion to
€212.7 billion. Daily excess reserves averaged
€1.3 billion, an increase of €0.2 billion over the level in the previous three maintenance periods (see Chart A).
Liquidity supply
Over the three maintenance periods under review, the volume of outstanding refi nancing operations averaged €724 billion,1 up from the average level of €721 billion recorded in the previous three maintenance periods. In addition, as of 10 August 2010, assets with a total value of €121 billion were purchased under the CBPP and the SMP.
The average size of the one-week main refi nancing operations stood at €150.9 billion, compared with an average of €78.2 billion in the previous three maintenance periods. The
size of special term refi nancing operations with a maturity of one maintenance period averaged
€32.8 billion, up from €9.3 billion in the previous three maintenance periods. On 30 June 2010 the fi rst 12-month LTRO of €442.2 billion matured. Of the maturing amount, €111 billion was rolled over in the form of a six-day bridging operation and €130 billion via a three-month LTRO.
Accordingly, the total volume of outstanding three-month and six-month LTROs increased to
€220.8 billion on 10 August 2010, compared with €37.5 billion on 11 May 2010.
In the period from 12 May to 10 August 2010, the liquidity absorbed via fi ne-tuning operations with an overnight maturity on the last day of each maintenance period averaged
€255.4 billion. This compares with an average of €302.2 billion in the previous three maintenance periods (see Chart B).
The liquidity injected through the SMP was absorbed through weekly collections of fi xed-term deposits. The fi rst of these operations was carried out on 18 May 2010 for an amount of €16.5 billion, which increased to around €60 billion on 10 August 2010. Since then, the amounts involved in the liquidity-absorbing operations have increased only marginally, refl ecting the diminishing interventions under the programme.
1 Disregarding weekly SMP-sterilising operations, which averaged €42 billion.
Chart B Liquidity needs of the banking system and liquidity supply
(EUR billions; daily averages for the whole period are shown next to each item)
-1,000 -800 -600 -400 -200 0 200 400 600 800 1,000
-1,000 -800 -600 -400 -200 0 200 400 600 800 1,000
CBPP and SMP portfolio: €106.6 billion main refinancing operations: €150.9 billion longer-term refinancing operations: €581.2 billion fine-tuning operations: €43.3 billion
autonomous factors: €369.9 billion current accounts: €214.1 billion
net recourse to deposit facility: €211.4 billion reserve requirements: €212.7 billion
Liquidity supply
Liquidity needs
15 June 2010
12 May 13 July 10 Aug.
Source: ECB.
2.4 BOND MARKETS
Developments in bond markets over the past three months were driven by renewed market concerns about the near-term economic outlook for the global economy, and particularly for the United States. Against this background, market sentiment worsened and the rebound of risk aversion towards the end of the review period triggered signifi cant fl ows away from risky assets. As a result, AAA-rated long-term government bond yields declined markedly in both the euro area and the United States. Long-term euro area break-even infl ation rates also declined signifi cantly over the period. Intra-euro area sovereign bond yield spreads, particularly in the case of countries with weak fi scal positions, widened during the summer period. By contrast, corporate bond spreads changed little from their early June levels.
Use of standing facilities
As a result of the signifi cant contraction of the liquidity supply after the maturity of the fi rst 12-month LTRO,2 net recourse to the deposit facility 3 decreased to a daily average 4 of
€96.6 billion in the maintenance period ending on 10 August 2010, down from €288.4 billion in the maintenance period ending on 15 June 2010.
Interest rates
The ECB’s key interest rates have remained unchanged since 13 May 2009, with the rate on the main refi nancing operations standing at 1.00%, the marginal lending rate at 1.75%
and the deposit rate at 0.25%.
As a result of the ample liquidity in the euro area, the EONIA continued to remain close to the deposit facility rate until the maturity of the fi rst 12-month LTRO, averaging 0.343% (see Chart C), which is slightly lower than the average of 0.348% prevailing in the preceding three maintenance periods. After 30 June 2010 the EONIA shifted upwards, recording an average of 0.467% between 1 July and 10 August 2010. On the last day of the three maintenance periods under consideration, the EONIA stood at 0.728% on average, about 38 basis points above the average level observed on the previous day. This is explained by the absorption of liquidity via fi ne-tuning operations on those days.
In addition, the average spread between the three-month EURIBOR and the three-month EONIA swap rate – which is an indication of the level of credit and liquidity risk in the unsecured money market – increased somewhat to 38 basis points in the period under review, compared with an average level of 27 basis points in the three previous maintenance periods, on account of a renewed heightening of fi nancial market tensions.
2 Total refi nancing operations outstanding averaged €604 billion between 1 July and 10 August, compared with €822 billion between 12 May and 30 June 2010.
3 Net recourse to the deposit facility refers to recourse to the deposit facility minus recourse to the marginal lending facility.
4 Average net recourse to the deposit facility includes weekends.
Chart C The EONIA and the ECB’s interest rates
(daily interest rates as percentages)
0.0 0.5 1.0 1.5 2.0
0.0 0.5 1.0 1.5 2.0
12 May 11 June 11 July 10 Aug.
EONIA
fixed rate on the main refinancing operations corridor set by interest rates on the marginal lending and deposit facilities
2010 Source: ECB.
Monetary and financial developments
Between early June and 1 September 2010 strong fl ows away from more risky assets led to a 45-basis point fall in the level of AAA-rated euro area ten-year government bond yields, which ended the period close to all-time lows of around 2.5% (see Chart 21). In the United States, the decline in the ten-year Treasury bond yield was similar – about 40 basis points, to 2.6% – and long-term US bond yields reached their lowest levels since spring 2009 over the review period. Accordingly, the ten-year nominal interest rate differential between euro area and US government bonds narrowed to stand at around 10 basis points in early September.
Market participants’ uncertainty about near-term developments in long-term bond yields in the major markets, as measured by implied bond market volatility, declined for most of June and July but, amid mounting market concerns on the economic outlook, rebounded somewhat in August. It remained, nonetheless, well below the peaks observed in May 2010.
In the US bond market, the period under review was characterised by increasing concerns about the sustainability of the recovery in economic activity. A number of macroeconomic data releases for the US – particularly the confi rmation of a growth slowdown in the second quarter of 2010 and the weakness of the housing and labour markets – and for some other major economies took their toll on market sentiment and triggered strong fl ows into US long-term government bonds.
Offi cial statements by the Federal Reserve System, reiterating that policy rates should be expected to remain low for an extended period of time and announcing that the Federal Reserve would re-invest the proceedings from its previous bond purchases into Treasury bonds in the light of the weak macroeconomic environment, may have also contributed to a lower level of long-term US bond yields. Indeed, US government bond yields declined for all maturities, but the declines were stronger in the case of longer ones, and the US yield curve fl attened signifi cantly.
Developments in the euro area bond market over the review period were also driven by swings in market sentiment. The introduction of the European Financial Stabilisation Mechanism in early May contributed to ease somewhat market concerns about sovereign risk in the euro area.
The ECB’s Securities Markets Programme (see Box 3 in the June 2010 issue of the Monthly Bulletin), which is intended to ensure depth and liquidity in poorly functioning segments of the debt securities market and to restore an appropriate functioning of the monetary policy transmission mechanism, also had a positive effect on sovereign risk concerns. Indeed, some unwinding of the strong fl ight-to-safety fl ows observed during May took place during June and July. Risk appetite also appeared to normalise following the publication of the results of the EU-wide bank stress tests and related information on banks’ sovereign debt exposures. Later on, however, market concerns about the outlook for the global economy resurfaced and triggered further fl ight-to-safety fl ows into high-rated government bonds. Indeed euro area AAA-bond yields reached historical lows (below 2.5%) in August. Euro area ten-year sovereign bond spreads