I still see folks suggesting that the ECB’s Long Term Refinancing Operation (LTRO) be used as a Carry Trade for Sovereign Debt. Banks will buy up a bunch of Sovereign Debt, stick it into the and earn the spread.

However, you can’t really carry trade a marked-to-market fully collateralized loan because the collateral you have to post will move as spreads widen or shrink. This means that moving assets on the LTRO does not dispose of liquidity risk. If the price of the debt falls you still have to immediately come up with funds from somewhere.

If you borrow cheap and lend dear but retain all liquidity risk then this is just ordinary financing.

However, what you can do by moving more non-marketable assets on to the LTRO is free up liquidity, which in turn allows banks to play their traditional role in arbitraging away spreads.