Reuters: US Dollar Report: MONEY MARKETS-Dwindling Spanish repo adds to bond market plight

Reuters: US Dollar Report Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

MONEY MARKETS-Dwindling Spanish repo adds to bond market plight Aug 29th 2012, 14:36 Wed Aug 29, 2012 10:36am EDT * Data shows Spanish repo market declined 23 pct in July * Dwindling repo liquidity worsens state of bond market * Italy market shows growth, benefits from greater liquidity By William James LONDON, Aug 29 (Reuters) - Market sources of funding for Spanish banks shrivelled in July according to ECB data showing a 23 percent shrinkage in Spain's repo sector that exacerbates the parlous state of its government bond market. The data from the European Central Bank showed the value of centrally cleared repo transactions, where money is borrowed using a bond as collateral, tumbled to 35.5 billion euros last month, extending a steep decline seen over the last 10 months. The fall reflects Spanish banks' increasing reliance on the ECB's lending operations, rather than the open market, to meet their refinancing needs as confidence in the country's sovereign and financial assets evaporates. "The amount of assets being parked at the ECB by Spanish banks has been going up and up and a lot of that is going to be Spanish government bonds," said ICAP analyst Chris Clark. "As more of the available stock gets stashed away with the ECB, there's less available collateral to use in the repo market." Market makers, whose role is to offer buy and sell prices on a country's debt, often rely on the repo market to gain short-term access to bonds to fulfill orders. As that process becomes more expensive, bid-offer spreads on the government bonds widen and participation in the market drops, providing another disincentive to buy bonds at auction. This vicious circle reduces liquidity in the Spanish government bond market and makes it less viable, analysts said. ITALY THRIVES In contrast, Italy's repo market is growing, benefiting from the perception that it is slightly less risky than Spain and from its much larger stock of debt. The ECB data showed 7.7 percent growth in cleared repo transactions during July to 121 billion euros. "Unlike the Spanish banks, market conditions for Italian banks have not deteriorated significantly over the last few months," Barclays Capital analysts said in a note. The search for low-risk investments has squeezed yields on traditional short-term safe-haven assets such as German bills and pushed their corresponding repo rates below zero, making the slender returns available through Italian repo more attractive. "It's basically the only liquid repo market out there that offers positive returns on cash. If you've got cash to invest, you can either lose money on it by lending against 'core' (government bonds) or you can pick up a modest return by lending against Italian paper," ICAP's Clark said. The one-week Italian repo rate was last at 0.22, according to data from the MTS exchange. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions