In the light of the historical relationship between the Eurosystem excess liquidity and the Euribor vs. €STR spread, 20-30bps spread levels could be reached when the excess liquidity declines to below EUR 2tn from over EUR 4tn currently. Assuming that the banking turbulence can be contained, we expect TLTRO repayments and the ECB’s reduced APP reinvestments to lower the excess liquidity to around EUR 3.5tn by the end of this year.
Accounting for the fact that the relationship between the excess liquidity and the Euribor vs. €STR spread does not necessarily follow the historical pattern when liquidity conditions are tightening rather than easing, we think that the current forward pricing of the Euribor vs. €STR spread is relatively reasonable and accounts for upside risks to what could be expected from the historical relationship alone.
- SEB Strategy
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