David Buik of BGC Partners expects bond yields to fall in the coming months due to this liquidity injection. "We have seen Italy come down from 6% to 5.5%. We have seen Spain threatening to dip below 5%. This is a big improvement.
In yet another effort towards liquidity infusion in the European economy, the European Central Bank (ECB) today disbursed around 530 billion euros of cheap three year loans to the European banks.
The ECB's long term refinancing operation (LTRO) saw a total of 800 bidders for its loans which come at an interest rate of 1%.
David Buick of BGC Partners expects bond yields to fall in the coming months due to this liquidity injection . "We have seen Italy come down from 6% to 5.5%. We have seen Spain threatening to dip below 5%. This is a big improvement. We have seen Portugal come down from 15 or 16% down to 12%, " he added.
However, he cautions that the 10 year bond yield in Greece is still around 34% despite agreements being in place for the bailout. He feels that there is a huge scepticism in the market if this bailout will be helpful.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: What it above market expectations what are your first thoughts?
A: Just slightly better. We were expecting somewhere between 417-500 billion euros, we got 529 billion euros. Immediate market reaction has been quite good. Bonds markets are still relatively flat. We have to remember that it has lost some of its bite in the course of the last few weeks and that is very encouraging. But some of the bank shares have done rather well particularly, Spanish and Italian banks. Even Barclays in UK rallied by about 1.7% as a result of this news.
I don't think we need to read too much into it apart from the fact that it is an endorsement of how short of liquidity the European banking sector is. This is an absolute declaration of help from the ECB and the European Union. The ECB now has got a huge balance sheet and is prepared to stand behind the banking sector.
Sir Mervyn King, the Governor of the Bank of England has said that UK banks really didn’t need it because they have got plenty of liquidity here, but the only thing is that his liquidity is rather more expensive than ECB. So, the Royal Bank of Scotland availed themselves of 10 billion, Deutsche Bank of 5 billion which is a little less than we thought. But it is a good sign, it is steady of the market place.
But we are still far from convinced that the bond market we know it is a proper international bond market because everything and all the traffic seems to go in and out of the ECB. It doesn’t seem to be what I call a liquid market of bonds particularly, in the European bonds which are traded readily and very freely.
Q: There is a view point that bond yields may fall in the coming months because of this liquidity injection. What are your thoughts on that front?
A: It’s true. We have seen Italy come down from 6% to 5.5%. We are now down towards 5.38% and we have seen Spain threatening to dip below 5%. This is a big improvement. We have seen Portugal come down from 15 or 16% down to 12%.
The only one that we are seriously concerned about is Greece, which has hardly moved despite the fact that all these agreements are in place, but they are still going to take a number of weeks and to be agreed. The 10 year bond yield in Greece is still around 34%.
So, the market is telling us that there is a huge cynicism as to whether this bailout is actually going to work.
Q: What have banks done with the first tranche of LTRO? What are they expected to do with the liquidity that is going to come in now with a second tranche?
A: This is what isn’t clear. What we felt really as observers is that there should have been more clarification of the money that was going into the banks. Was it going to be used for in the case of United Kingdom for mortgages, and was it going to be used for small and medium term companies for them to borrow? Where was the money actually going to be used on a fully utilized basis to be able to stimulate the stagnant economy?
Even though I think Chancellor Merkel of Germany said it is just another type of quantitative easing, we have got liquidity problems that slow everything, but the kitchen sink at it to make sure that the banks stand foursquare and are comfortable until such time as the economy recovers. But the jury is very much out of how much good it is going to do in the short-term. In the long-term we know the proper interest rates have to return. We will need a proper wholesale money market, which in Europe at the moment we don’t have.
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