November 13, 2019 / 1:21 PM / 25 days ago

U.S. repo squeeze unlikely to be repeated in Europe - bond conference

BRUSSELS, Nov 13 (Reuters) - A repo squeeze that hit U.S. money markets two months ago is unlikely to be repeated in Europe, given measures taken in recent years by the European Central Bank, panelists taking part in a bond conference debate said on Wednesday.

Markets got a scare in mid-September when overnight U.S. repo rates spiked to 10% — five times the federal funds rate at the time — sending banks scrabbling for cash and forcing the New York Federal Reserve to pump money into markets to prevent borrowing costs from spiralling higher.

That sparked fears that such stress in repo markets — the plumbing of the financial system — could occur in other markets including Europe.

But investors and industry officials at an Association for Financial Markets in Europe (AFME) conference saw that as unlikely.

“In the United States, the reason (behind the squeeze) was a lack of reserves. In Europe, we don’t have this, it is the opposite, we have an abundance of reserves,” Fabrizio Testa, chief executive at MTS, an electronic bond trading platform, told a panel discussion on trading and liquidity.

The exact reasons for the U.S. squeeze are still subject to debate but it was caused at least partly by the fact that reserves that banks park with the Fed, and are often available to borrow on an overnight basis, are at their lowest since 2011.

That was because the central bank has been cutting its bond portfolio for several years.

At the conference, an informal poll conducted by AFME on their app showed the majority of the audience — comprising investors, treasury and debt agency officials — believed a repo squeeze such as the one that U.S. markets experienced was unlikely in the euro zone.

“There are things that the ECB has done to address the repo market squeeze,” said Michael Surowiecki, executive vice president and portfolio manager at PIMCO.

Euro zone repo markets underwent a squeeze in 2016 and early 2017, which was attributed at least partly to a shortage of top-rated bonds that could be used as collateral. To resolve this issue, the ECB took measures such as introducing a bonds-for-cash scheme to help alleviate pressure in repo markets.

Panelists said the ECB’s securities lending programme was complemented by steps from national debt agencies to ease pressure on short-term euro funding markets.

For instance, some sovereign borrowers have ensured greater supply of “squeezed” bonds, said Nathalie Fillet, a business manager at BNP Paribas, referring to debt that is in strong demand among borrowers for collateral purposes.

Reporting by Dhara Ranasinghe; editing by Sujata Rao and Bernadette Baum

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