All eyes on Greece

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Eurogroup and European leaders took stock of further progress in the negotiations, following Greece’s submission of updated proposals over the last weekend, but called for a technical examination of the proposals. Yet it seems that a further programme extension (of the current second bailout) is on the table and could be agreed by the end of this week. The Eurogroup is scheduled to meet again on Wednesday evening.

Liquidity conditions : The results of the June TLTRO were broadly in line with our expectations with €74bn of gross take-up

•The MRO roll was in line with the amount maturing and at the 3m LTRO on Wednesday the borrowing should remain unchanged

•Therefore, the TLTRO borrowing, which settles on Wednesday, should be new liquidity injections

•As a consequence, the surplus should head towards €400bn, thanks also to the weekly QE purchases

Eonia: The increase in the surplus towards €400bn should push the fixing towards-14bp from about-12bp currently. The daily changes in the fixings are mainly due to the swings in Eonia volumes, which are calculated on the transactions reported by panel banks

Short rates:We maintain our recommendation of receiving the 5y5y Eonia forward, supported by expectations of an increase in the liquidity surplus. To hedge any increase in Greece risk, we suggest going short on the ERU5 contract on the Euribor future strip.

T-bills: Peripheral yields declined moderately last week, but continue to offer an attractive yield pick-up versus

Eonia and versus core. The spread versus

•Bubill at the 12m tenor is still wide (40bp) and very attractive in our opinion

Repo market: Liquidity in the repo market remains good, but concentrated in very short maturities. Some increase in repo rates is likely in the next few days because of the usual end-of-month technical factors.

 

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