The ECB Deposit Facility Sets a New All-Time Record

Remember that ECB Long Term Repo Operation (LTRO?) when they gave the banks in Europe a net $210 billion Euros to be used to buy sovereign bonds, well today we have a new record as more banks are willing to take a negative return of .75% on their newly borrowed money (3 year term). Of the original $210 billion, since the LTRO, $187 billion of that money is parked at the ECB deposit facility earning .25% interest (remember it cost 1% to borrow) for safe keeping. Thus far the LTRO carry trade the ECB envisioned has been a major flop like all of the other rescue plans out of Europe and sadly, this too was predictable as banks have been selling everything to raise cash since August, they are now expected to use that very same cash they find so hard to come across to buy one of the most toxic assets in the world (one which they have been trying to sell for 6 months?).

Contrasting the banks behavior, surprisingly Italy sold $1.7 bn Euros of 24 month zero coupon bonds today and at a low yield of 4.85% which is much lower then the auction a month ago that priced at 7.8%, however there was limited demand as they sold $1.7 bn but had targeted $2.5 bn for sale, an odd occurrence that the yield suggested demand, but the take up was cautious.

Italy also sold $9 billion in six month bills at 3.25% which is about half of the yield at the last 6 month auction. Tomorrow Italy sells 3 year bonds which would be the optimal target bond for LTRO cash being it is a 3 year loan. What would happen when they try to sell 10 years would really be interesting, overnight the 10 year BTP was over 7% again, the red line that has forced 3 other governments to seek bailouts.

The Italian bond sales had lifted ES overnight, but as you can see the market is continuing the negative behavior observed in 3C yesterday as multiple time frames aligned in leading negative divergences, however the real story is in ES and the 3C divergence right at the US open.

The yellow arrow is the EU open, prices rose on the Italian bond issuance, but look at the 3C negative divergence in to the highs.

Santa seems to be headed back to the North Pole rather then to Wall Street.