Low take-up at ECB's TLTRO 5, but liquidity outlook remains bright

The results of the ECB's fifth TLTRO on 24 September were particularly weak, with a take-up of a mere €15.5bn, the lowest among all TLTROs conducted so far. A combination of large borrowing at the previous TLTROs and low market rates are probably the main explanations for banks' low participation this time. As a result, the TLTRO 5.0 contribution to the liquidity injection was minimal. 

"However, it is unlikely to seen as a major issue as the ongoing QE purchases at a pace of €60bn per month are expected to push the excess of liquidity well beyond €1trn by the end of the current QE programme, currently scheduled for September 2016. The liquidity outlook might be even brighter if the ECB decides to strengthen its QE purchases, as we expect, by the end of the year", said Barclays in a research note to its client.

Euro short rates have rallied over the past two weeks. The movement has been remarkable not only at the long part of the money market curve, which is more sensitive to the dynamic in the rates market, but also at the very front end, which has so far been much more stable because of the ample liquidity surplus. Indeed, 1y Eonia has rallied about 3bp to -17.5bp and the 1y1y Eonia forward has dropped even more (6bp) to -18bp. As a result, the Eonia curve has flattened, becoming more inverted up to the 2y tenor. This has supported our trade idea to go long ERM7 vs ERM6 on the Euribor strip.