There had been talk that banks would flock to the ECB loans and use them to snap up higher-yielding peripheral government bonds in so-called "carry trades". Italy tends to be the main beneficiary of such trades because of its higher yields, analysts said. But this speculation was dampened by the results of the funding round, sparking a modest sell-off in bond markets already on the back foot after the US Federal Reserve on Wednesday cut rates but dashed hopes of further easing.
"There was disappointment at the allotment in the latest round of ECB loans and this challenges speculation about a potential boost to peripheral carry trades," said Richard McGuire, head of rates at Rabobank in London. Italy's two-year bond yield rose to as high as -0.18%, before pulling back to -0.21% - still up 3 basis points on the day. Yields across the Italian curve were up to 3 bps higher, underperforming other euro zone bond markets.
Higher-rated euro zone government bond yields also rose earlier in the day, reacting to Wednesday's Fed decision. But yields eased after the Bank of England warned Brexit uncertainty was causing slack to re-emerge in Britain's economy and damaging productivity. It kept rates unchanged at 0.75%. It was also heavy day for new debt supply, with France selling 1.7 billion euros of inflation-linked medium and longer-dated bonds and Spain selling nearly 4 billion euros of short, medium and longer-dated bonds.
"We see several reasons for this very low take-up (of loans), but the bottom line is that most banks are likely to wait for the next operation in December," said Frederik Ducrozet, a strategist at Pictet Wealth Management.