It’s worth remembering the market freaked out only after the ECB announced changes to its Securities Lending Facility (SLF).
The assumption being, notes Fernandez, that the changes fell short of what the market had been hoping for in terms of accommodation. Since nothing more has changed since then, there’s no basis to assume the market is feeling happier now.
European repo markets have always been fragmented, disjointed, opaque and mysterious.
Suppose that, to stabilise the repo market, excess liquidity from bond-buying must immediately be re-absorbed into ECB coffers through the securities lending facility and/or by giving non-bank institutions access to the deposit facility.
It would render the entire QE exercise a potential farce, unless the goal were just to flatten the yield curve.
Either way, what’s becoming apparent is that what the market really wants is access to liquid bond collateral, not central bank liquidity. And for the market to be truly pacified, the ECB must now become the depositor of last resort.
In that sense ECB liquidity may have become (in a nod to Gresham’s law) the bad stuff nobody wants to hold on to, while bond collateral is now the good stuff everyone wants.