Banks will return €296.3 billion ($308 billion) of cheap loans to the European Central Bank after their terms were toughened to help the battle against record inflation. 

The repayment represents just under 15% of the total outstanding amount of so-called TLTRO loans, which were used during the pandemic to keep credit flowing to households and businesses. The median forecast in a Bloomberg poll this month was for €600 billion to be given back. The projections ranged from €200 billion to €1.5 trillion.

German two-year bonds erased losses and outperformed equivalent interest-rate swaps after the data. The spread between yields and swap rates widened two basis points to around 84 basis points.

Eoin Treacy's view

Christine Lagarde was very clear in stating today that the ECB is recommitting to their sole official mandate of getting inflation back to target and avoiding “secondary effects”. The threat of inflation becoming entrenched is non-trivial because the solutions to the region’s energy crisis all imply paying more than before the crisis. That means killing demand is the only way to get inflation under control and it is not yet clear the ECB has the stomach for that kind of action.

Calling in loans made during the pandemic will quickly siphon cash out of the Eurozone economy. The size of the ECB’s balance sheet surged by 88% during the pandemic. Reducing it will remove some of the monetary contributions to inflation but does not solve the energy issue.  

The Euro continues to pause in the region of the 200-day MA. The spread between the European and US 2-year bonds popped on the upside today. That suggests investors are not quite yet willing to give full credence to the ECB’s claims to be intent on fighting inflation.  

The Euro STOXX Banks Index continues to extend the breakout from the short-term range. The promise of higher rates and a stronger currency are being welcomed by the sector. Meanwhile the bad loan issues which plagued European banks over the last decade are at least well understood at this stage.

The Euro STOXX Index has broken its yearlong downtrend. That suggests the 350 area is likely a significant low in what has been an exceptionally choppy trend over the last 22 years.