STIR: UK funding market pressures likely to reverse next week (1/2)
Oct-31 11:54
- RONIA is in focus at the moment and the increase in the rate is causing some questions and likely led to the increase in STR takeup (and may have contributed to ILTR takeup this week too). As we noted above, the bid-to-covers on the UKTB auction are also likely impacted by temporary funding market pressures.
- RONIA doesn't normally move around a whole lot, but when it picks up it is a bit of a red flag that there is tightness in UK funding markets.
- Looking at the chart below there are several times when RONIA picks up: First, quarter-end when banks prefer to show "cleaner" balance sheets so temporarily want to reduce lending within the market. Second, we can see spikes in RONIA around gilt redemptions where the BOE holds a large portion of the gilt that is being redeemed.
- This latter point all else equal is associated with reductions in reserve balances which can lead to some funding pressures in money markets. This will lead to an increase in RONIA. However, over a few days this increase in RONIA will usually be addressed. If RONIA picks up then effectively it costs more to borrow on the open market. However, many market participants can borrow from the Bank of England via the STR or ILTR facilities, so if there is a spike in RONIA we tend to see a spike in STR usage. When STR usage picks up the funding pressures subside and RONIA moves back down to more normal levels.
- Instead of there being a gilt redemption, there have been some big repayments from banks to the BOE of TFSME loans. Now, rather than having that funding those banks will look to replace that borrowing through either the BOE facilities or via RONIA.
Chart source: Bloomberg Finance L.P.
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EU-RUSSIA: More Leaders Support Ukraine 'Reparations Loan', But Obstacles Remain
Oct-01 11:44
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A growing number of EU leaders are voicing their support for mooted EU plans that could see EUR140bln of frozen Russian assets held in the Union utilised as a zero-interest "reparations loan" for Kyiv. The loan would then only have to be repaid once Russia has, in turn, repaid Ukraine for war damage. European Commission President Ursula von der Leyen said in late September that “We will strengthen our own defence industry by ensuring that part of the loan is used for procurement in Europe and with Europe.”
- In a notable boost for the prospect of the reparations loan, German Chancellor Friedrich Merz backed the idea in an FT op-ed. At today's informal meeting of EU leaders in Copenhagen, a number of EU leaders have backed the idea. Latvian PM Evika Silina said, “We have long called for using frozen Russian assets to aid Ukraine.” Finnish PM Petteri Orpo called the plan "a very good idea", while Estonian PM Kristen Michal said the frozen assets should be utilised "as much as possible". Dutch PM Dick Schoof says the proposal "should seriously be considered, as long as risks are covered".
US TSY FUTURES: BLOCKS: Dec'25 5Y & 10Y
Oct-01 11:41
Both appear to be buys & crossed at same time: 0720:00ET
- +4,800 FVZ5 109-08.25, buy through 109-08 post time offer, DV01 $210,600
- +3,000 TYZ5 112-19, buy through 112-18.5 post time offer, DV01 $203,100
OUTLOOK: Price Signal Summary - Bear Threat In Gilts Still Present
Oct-01 11:27
- In the FI space, Bund futures continue to trade above their recent lows. Short-term gains appear corrective. Key support and the bear trigger lies at 127.61, the Sep 3 low. Clearance of this level would cancel a recent bullish theme and confirm a continuation of the medium-term bear cycle. For bulls, a clear reversal higher would refocus attention on key resistance at 129.44, the Sep 10 high. First resistance is 128.84, 61.8% of the Sep 10 - 25 bear leg.
- Gilt futures remain above their latest lows. The move down last week strengthens a bearish theme and does suggest the end of the recent corrective phase between Sep 3 - 11. Note that on the continuation chart, moving average studies are in a bear-mode position, highlighting a dominant downtrend. A resumption of weakness would open 89.94, the 76.4% retracement of the Sep 3 - 11 corrective phase. Initial resistance to watch is 91.28, the Sep 24 high.
