February 22, 2017 / 1:29 PM / 9 months ago

Time for ECB to address repo crunch roiling markets - ICMA

LONDON, Feb 22 (Reuters) - The European Central Bank should reassure investors it is seeking to ease a squeeze in short-term funding markets that has helped push the price of bonds to unprecedented levels this week, a top industry lobbyist told Reuters on Wednesday.

Godfried de Vidts of the International Capital Market Association held talks last week with the central bank over its asset-purchase scheme which he said is contributing to an acute shortage of bonds for repos, or repurchase agreements.

Banks and big business rely on repo markets to raise cash against collateral but a recent surge in funding costs threatens the functioning of this market often viewed as the plumbing of the financial system.

“One good sign would be if we get a statement from the ECB saying yes, we’ve heard you and we’re looking into this,” said de Vidts, who chairs ICMA’s European Repo and Collateral Council.

“It won’t take the tensions away but it will give the market a bit of comfort that it is looking at the issues. There is a lot of uncertainty and that would help scale things down a bit.”

The ECB introduced a bonds-for-cash scheme in December to try to reduce the stress in repo markets, and minutes of its January meeting showed policymakers have discussed further changes.

But De Vidts wants a public statement to temper investor angst. The central bank next meets on March 9.

A scarcity of German and French bonds at the turn of the year saw investors pay record rates to borrow that paper, used as collateral for guaranteeing trading positions, and avoid the risk of being put into default.

Analysts say this is partly driving demand for short-dated German bonds with yields -- which move inversely to prices -- striking new record lows on Wednesday.

De Vidts said the fact investors wanted to buy these high-quality bonds as a hedge against expectations of a further squeeze in repo markets as the end of the first quarter approaches was also a factor.

“We expect March to be horrible and June even worse. Then by the summer time we should have enough minds coming together to say we have to make changes,” he said. (Reporting by Dhara Ranasinghe, editing by Nigel Stephenson)

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