European Rates Weekly: Supply and demand themes for H2

Research evidence excerpt

European Rates Weekly: Supply and demand themes for H2

European Rates Weekly

02 July 2026 Citi Research

Excess liquidity has been a key driver of the spot 3m EE basis since the start of QE

back in 2014 (see Chart 12 here). Additionally, the basis has tracked financing

conditions in the OAT repo market over the last few years, suggesting some level of

competition between secured financing backed by sovereign collateral and

unsecured bank financing (see Chart 14 here). Historically, being long the basis has

been a loss-making proposition – mostly due to the average negative roll, which

makes us wary of establishing wideners in the upward-sloping portion of the 3m

EE curve (Figure 25).1

Q6. Banks hold liquidity for more compelling reasons than meeting MRR, notably

regulatory reasons. Does a higher reserve ratio change the opportunity set of

bank treasures?

We have written that raising the MRR is equivalent to a persistent negative excess

liquidity shock. For banks unwilling to lower their liquidity buffers (the numerator

of the Liquidity Coverage Ratio), lower excess liquidity holdings represent an

opportunity to increase holdings of other eligible assets – particularly L1 assets

such as EGBs. As a matter of fact, major bank jurisdictions have seemingly shown

little desire to materially reduce their combined holdings of ECB reserves and EA

(general) government debt. From August 2023 to May 2026, as the former dropped

by nearly €1.5tn, EA banks increased their holdings of the latter by €508bn – a

ratio of -3:1 (€1 more in govvies notional, €3 less in cash); by November 2024 that

ratio had increased to -2:1, and actually approached -1:1 in some key jurisdictions

(Figure 26). This infers that the persistent negative excess liquidity shock of nearly