CNB’s Outright Purchases Curb the Selling Pressure on CROATE Curve

The Croatian central bank has delivered it’s “whatever it takes” moment yesterday when a total of 4.075b HRK of local bonds were purchased to support the financial system. We’re not quite out of the woods yet, but together with ECB delivering a package of its own yesterday to support the periphery yields, it might be that the worst is behind us. More about it in this brief article.

Croatian central bank decided this week to step in and support the stability of financial markets, this time by purchasing a total of 4.075b HRK of short end (H217A, H22A, H227E) and long end (H327A, H34BA, H403E) bonds. The size of the ticket tells enough about the intensity of the selling pressure coming from the insurance companies, asset managers and banks. Since this monetary operation was scheduled in advance and was significantly larger compared to Friday’s inaugural outright purchase, it’s quite likely that the operation will manage to offset the selling pressure we have seen over the last weeks. In more simple words, since the operation was very well communicated to the public and since it included a broad spectrum of financial institutions (banks, insurance companies, asset managers and pension funds), it’s quite likely that most of the sellers trimmed their positions according to their liquidity needs and that the selling pressure should significantly weaken in the coming days.Outright monetary purchases were exactly what the market needed to stop long term CROATE yield from skyrocketing since other instruments of monetary policy were unable to touch the long-term yields. From this perspective, direct purchases were the only thing to do in order to prevent a complete collapse of the financial system.

Speaking about the liquidity put in the system by the central bank in last seven days alone, it’s worth mentioning that it exceeds 8.1b HRK (213m HRK on Friday’s outright purchase + 3.8b HRK on Monday’s structural operation + 4b HRK yesterday), which is clear message that the central bank will do everything within its limits of power to support the stability of the financial system. This is definitely good news for financial institutions in general that are trying to get liquidity from every source possible. The notion that central bank is prepared to play its part in bridging the liquidity squeeze that is global in nature assures that the financial markets will gradually start returning to their normal way of functioning.

Speaking about the context of the operation, we could say that it came at just the right time since global scramble for cash unwinds before our eyes. This morning, the nominal yield on US 3-month paper went into negative for the first time ever (USGG3M Index @ -0.13%), while the ECB announced a 750b EUR heavy PEPP (Pandemic Emergency Purchase Programme). This package is a breath of fresh air for the euro area periphery, which suffered from both harsh fundamentals and illiquidity. It’s worth bearing in mind that yesterday we saw 10Y Italy trading at Bund+278bps (at moments even wider), while this morning the spread has nosedived by at least 80bps to levels just below 200bps. Greece rallied massively with 10Y yield dropping from around 4.00% to just above 2.15% – we could say that the ECB stimulus is just what the Mediterranean country was looking for.

In a nutshell, asset managers are clearing their wounds and hoping that the worst is behind us. Although lockdowns in European countries have just began, it might be that the liquidity on the financial markets might start improving now that the support packages are being delivered. Only time will tell.

Ivan Dražetić, CFA
Category : Blog

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