By John Geddie and Helen Reid
LONDON, March 23 Investors snapped up financial
stocks and government bonds from the euro zone's weakest
countries on Thursday after banks took more cheap long-term
loans from the European Central Bank than expected in the final
round of a crisis-fighting scheme.
The loan scheme originally designed during the 2011 debt
crisis was tweaked last year to allow banks to get paid up to
0.4 percent of what they borrow on condition that they lend more
to companies or consumers.
In the last of these targeted long-term refinancing
operations (TLTRO) on Thursday, some 474 banks took up 233.5
billion euros of four-year loans, well above the 125 billion
euros expected in a Reuters poll.
This suggests banks anticipate a rise in lending, while
analysts said they are also likely to continue to invest some of
the money in government bonds from the likes of Portugal and
Spain which pay relatively high levels of interest.
With the ECB also set to trim the amount of money it pumps
into the financial system by cutting its monthly bond purchases
next month, some see the end of the TLTRO scheme as a signal
that the worst is over for the bloc.
"That (TLTRO) was a policy designed for extraordinary times,
we are not in them now," said Nick Gartside, JP Morgan Asset
Management's international CIO for fixed income.
"You have growth above trend, you have politics calming down
and you have the market pricing in both tapering (of bond
purchases) and higher deposit rates. We are shifting from a
story that was about divergence to one of convergence and it
will be the ECB doing the converging."
Yields, which move inversely to prices, of Portuguese
, Spanish and Italian bonds
fell as much as 5-7 basis points before paring
those falls as the session wore on.
That narrowed the gap with German equivalents,
which also faced upward pressure from rising U.S. bond yields
The premium investors demand to hold Portuguese bonds over
German equivalents briefly fell to a three-month low. The
premium for Spanish bonds fell to a one-month low.
"The talk that this money would be used for carry trades
seems to be confirmed by these results and the market reaction,"
said ING rates strategist Benjamin Schroeder.
An index of euro zone banks climbed almost 1
percent, outperforming the broader euro zone stock index
which was up 0.8 percent on the day.
"The cheap funding boosts the banks' interest margins," said
Arne Petimezas, analyst at AFS Group. "This is the last time
they could get such cheap loans, so they can pay down some of
In the future, banks will only be able to get either
one-week or three-month loans from the ECB, which will be an
enormous cut in the duration of credit available to them.
(Additional reporting by Patrick Graham; Editing by Andrew