The 2024/2025 year-turn: don’t ask, don’t tell

Summary
 

• Since time immemorial, year turns in Eurozone money markets have been marked by rates on trades maturing past the turn falling off the proverbial cliff. Banks window-dressing their balance sheet and artificially boosting their leverage ratios are to blame. Wholesale depositors pay the price: paying penalty rates (in the negative interest rate era) or receiving a penalty rate. That, or having to buy Treasury bills at a premium;
• This time will be different. I expect the upcoming turn to be the most benign on record. The premium on bills that mature just past the turn will be low or perhaps even negligible;
• A confluence of factors is making the turn easier than it was before. Collateral scarcity is a thing of the past. Collateral is widely available these days, which is reflected in the strong rise in repo rates this year relative to ECB administered rates. Furthermore, banks’ leverage ratios are the highest on record, reducing the need for banks to reject wholesale deposits or charge penalty rates. For a second year in a row, banks do not have to contribute to the resolution fund. Contributions to the fund are based on banks’ deposit base. Finally, there is no dollar scarcity;
• ECB Quantitative Tightening and TLTRO repayments have drained bank reserves to the lowest level since the pandemic. Since reserves are unequally distributed across member states and within member states, I expect there will be some outright borrowing over the turn to boost (regulatory) liquidity;
• In this note I explain why the turn will be benign. I discuss the factors that influence the turn and the correlation with the premium in bills that mature just past the turn. In part two (soon to be released), I will show why I think some banks will be on the borrowing side over the turn.