Last week I wrote about the disappointing nature of the first round of TLTROs by the ECB (http://trueeconomics.blogspot.ie/2014/09/1892014-quite-disappointing-tltro-round.html). Now, some more evidence that TLTROs are at best replacing / swapping liquidity in LTROs maturities without materially changing the nature of the banks assets holdings. Remember, the objective of TLTROs is to inject funds into corporate lending, not sustain or increase flows of funds into sovereign debt markets... which means sovereign yields should not be falling in connection to TLTROs.
So guess what's happening?
The chart above shows several things:
- Both Spanish and Italian yields are falling across all maturities in excess of 1 year.
- The margin from lending to the Spanish and Italian Governments (yield on bonds less cost of TLTRO funds) is lower across all maturities post TLTRO issue than before.
- Margin declines are not uniform across maturities, and generally steeper at longer maturities.
Are the banks taking up TLTROs pushing up prices of Government debt?.. That would mean more disconnection between the monetary policy objectives and outcomes, right?..