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Money markets eonia rates trend higher as banks grow cautious on funding


Nov 27 Overnight Eonia lending rates have been creeping higher as banks repay the European Central Bank the long-term funding they borrowed during the height of the debt crisis, prompting excess liquidity to fall. Excess liquidity in the euro zone banking sector - the amount of money in the market over and above what the banking system needs to function - last stood at 154 billion euros. It fell below the 200 billion-euro threshold - where historically Eonia rates have risen - in October. The latest data underscore the tendency among banks to repay long-term funding to the ECB rather than borrow more, analysts said. The ECB lent banks 5.926 billion euros in a 91-day operation, in line with a Reuters poll forecast but short of the 6.823 billion euros maturing that same day from an old operation."The three-year LTRO (long-term refinancing operation) repayment remains high, there is no increased demand in the longer-term operations, even though they do cover year-end, so there seems to be a reluctance to take on a longer ECB funding, or even a tendency to shed longer-term ECB funding," Benjamin Schroeder, strategist at Commerzbank said.

"It definitely highlights the liquidity risks we have when we start in the next year."Eonia rates have crept higher in recent weeks and last traded at 0.13 percent compared with around 0.07 percent in mid-November.

Schroeder said overnight Eonia lending rates may fall back to single digits following month-end, after the ECB lent 97 billion euros in a 7-day operation on Tuesday and failed to fully sterilise its bond purchases by draining liquidity out of the system. But analysts expect rates to trend higher next year. In theory, the fact that banks don't need as much funding is a sign that they are on a stronger footing, though some analysts say there is a growing stigma associated with borrowing more or not repaying loans as quickly as others have done. But in practice, it also tightens monetary conditions - by lowering excess liquidity and putting upward pressure on Eonia rates - at a time when the ECB is trying to boost growth.

ECB officials have hinted at more monetary easing in recent weeks, after the pace of the euro zone recovery slowed more than expected in the third quarter. An unexpected fall in annual inflation for October prompted a surprise ECB rate cut. As excess liquidity continues to drop and Eonia rates to rise, analysts say speculation about more ECB action will mount. The latest such talk involved the possibility of another LTRO. The ECB is considering an operation available only to banks that agree to use the funding to lend to businesses, a German newspaper reported on Wednesday, citing sources."The more general worry is that as excess liquidity declines, it does put some upward pressure on Eonia rates and for that reason, if they were to do anything else, in the first instance it would be looking to take the deposit rate into negative territory," Philip Tyson, strategist at ICAP said.

Money markets euribor rates fall below their us equivalent


Interbank Euribor rates have fallen below their dollar counterparts as money markets expect the European Central Bank to play catch up with the near-zero rate policy of the U.S. Federal Reserve. Money markets are increasingly pricing in the possibility that the ECB will cut refi rates again in the second half of this year and/or reduce the deposit facility rate which would take it to negative territory. While only seven in a Reuters poll expect the central bank will cut the refi rate by 25 basis points for a second month in a row in August, the survey showed a clear majority - 44 out of 69 - expect it will do so before 2013. An interest and deposit rate cut earlier in July, along with expectations of more to come, drove three-year Euribor rates to new record lows this week and below U.S. interbank lending rates last for the first time since 2008 recently. But analysts said the move was more a reflection of rate expectations than any indication that the escalation in the euro zone debt market was seeping through into money markets."In January 2008, it was tensions in the U.S. dollar market that pushed three-month Libor up. This explains why in that period, the dollar Libor was much higher than Euribor," Giuseppe Maraffino, strategist at Barclays said.

"Now the fact Euribor is lower than dollar Libor reflects different monetary policy expectation between Europe and the U.S. (rather than rising tensions in Europe)."Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.427 percent from 0.435 percent. That was below the U.S. dollar Libor rate which last stood at 0.448 percent. Maraffino said the market was pricing in some chance of a rate cut in the fourth quarter of the year, while in the United States the debate is now more about whether or not the Fed would do another round of quantitative easing. Fed Chairman Ben Bernanke last week offered a gloomy view of the economy's prospects, but provided few concrete clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus.

"U.S. rates are already close to zero, so the Fed is not expected to cut the Fed fund rates further, whereas in the euro zone, markets are pricing in further monetary policy action by the ECB via a policy rate cut," Maraffino added. The spread between three-month Euribor rates and three-month dollar Libor rates fell below zero for the first time since 2008 on Friday and was last at -2 basis points. Given market expectations for lower interest rates in the euro zone, analysts expected that gap to fall further, as far as -10 to - 15 bps.

"You could argue that the ECB has not been as accommodative as the Fed until now. So if it's a catch-up game, then the gap can be closed but it's going to be closed on the ECB's leg, not on the Fed's leg," Matteo Regesta, strategist at BNP Paribas said. Both the ECB and the Fed will hold monetary policy meetings next week. Markets are hoping for at least some signal of further action as Spanish borrowing costs rose sharply this week in the latest escalation of the euro zone debt crisis. Two rounds of cheap ECB financing has insulated money markets somewhat from volatile debt markets by ensuring banks are awash with cash. But the liquidity has done little to solve their underlying problems and to inspire banks to lend. In a sign of that reluctance, the ECB said 11 percent of banks that took part in its latest quarterly Bank Lending Survey made it harder for companies to borrow in the second quarter, while only 1 percent eased their rules. Separate data showed the ECB saw a jump in demand for its dollar funding as a deepening crisis left an increasing number of banks reliant on central bank support."It tells you that with the escalation of the euro crisis to yet higher levels, pressure for dollar funding is increasing. European institutions are recently finding it more difficult to fund in non-euro denominated assets," Regesta said. "That's clearly a result of risk aversion."

Money markets euro rates march lower, room for more declines


* Euribor rates continue fall* No barrier to falling below 1 percentBy Kirsten DonovanLONDON, Jan 27 Euro zone interbank lending rates continued to fall on Friday with plenty of room to slide further given the ample excess liquidity in the banking system, even before the ECB offers banks more three-year funding next month. Benchmark three-month Euribor rates dropped to their lowest since March 2011 at 1.138 percent, down from 1.142 percent in the previous session. The rate has fallen by more than 30 basis points since the European Central Bank announced in December that it would offer banks three-month funding with a take-up of almost half a trillion euros of the cash and another such tender at the end of February. With the three-month Euribor rate falling by just over a basis point a day on average since banks got the cash, the forward rate implied by the March Euribor future of 0.95 percent still holds significant downside potential should the rate of decline continue, Commerzbank strategist Christoph Rieger said.

"Granted the downside dynamic should subside at lower levels and some are pointing to the 1 percent refinancing rate level as providing support," Rieger said. However that argument did not stand up in 2009/2010 when the ECB first flooded the market with 12-month funding, pushing the three-month Euribor rate as low as 0.63 percent."We would not attempt to catch the falling (Euribor) knife yet," Rieger added. Excess liquidity in the banking system has averaged 449 billion euros this year, according to BNP Paribas, versus 102 billion euros in 2011 and 147 billion euros in 2010.

And that is before another three-month tender at the end of February at which a Reuters poll forecasts a demand of 263 billion euros, although many analysts expect a higher figure. Italian banks raised their borrowing from the ECB by 57 billion euros in December to 210 billion euros, while Spanish banks' borrowing rose 26 billion euros to 132 billion euros. German banks however more than doubled their borrowing to 55 billion euros, something Commerzbank says underscores the fact that taking liquidity from the ECB has lost its stigma and the only restriction to taking cash at the next three-year operation is availability of eligible collateral.

The ECB's tactic of providing liquidity has eased tensions in the banking sector, at least for the time being and markets are not looking for the central bank to cut its main refinancing rate any time soon. Some analysts do look for a cut in the bank's overnight deposit rate however, which would make it less attractive to park funds there overnight rather than lend them out. The amount of cash left at the ECB overnight over and above the average reserve requirement touched its highest since May 2010 earlier this maintenance period at nearly 140 billion euros, according to Reuters data. With the overnight Eonia rate settling a few basis points above the deposit rate, any cut in the deposit rate would pull Eonia rates lower and feed through to Euribor rates with the spread between the two narrowing as banking tensions ease."Euribor should continue to edge lower for two reasons," said Laurence Mutkin, strategist at Morgan Stanley."The market is underpricing the probability of a cut in the deposit rate, which would lead to a fall in Eonia and the excess liquidity should mean that banks have lower demand for unsecured cash."

Money markets rate swaps show high central bank expectations


U.S. interest rate swaps have rallied sharply this month even as yields on risky European debt, including Spain's bonds, increased, a move that some fear may reflect overconfidence in the ability of central banks to stem contagion from Europe's debt woes. Two-year interest swaps, which are seen as a proxy for bank credit risk, tightened to 22.50 basis points on Monday, and are down from 38 basis points at the beginning of the month. The move since June 1 reflects a breakdown of the swaps' previously strong correlation to Spanish, Italian and other peripheral European debt spreads, which have been worsening. The rally in the swaps may reflect high market confidence in central bank programs to ease pressures on the region's banks, said Ralph Axel, an interest rate strategist at Bank of America in New York."The market more and more believes that central banks will do whatever is necessary, and not just that they will act but that they can effectively prevent any kind of funding or liquidity problems," Axel said."As soon as that confidence leaves, it could be a major swap widening event, though I don't know if that will happen," he added.

Analysts at Barclays Capital noted that the correlation between Spain's sovereign debt and other assets, including world stock markets, has also broken down of late, calling the effect "puzzling.""We very much doubt that it will persist if market pressures on Spain continue to mount in the weeks and months ahead," Michael Gavin, head of global macro and emerging market strategy said in a report on Monday. Spain formally requested European aid for its indebted banks on Monday, but the lack of details rekindled investor doubts over the financial sector, hours before Moody's was expected to cut the ratings of all Spanish lenders.

CONFIDENCE COULD WORSEN Bank of America's Axel recommends entering into trades that would benefit from two-year swap spreads widening from around 20 basis points, noting these levels are near their tight levels historically and on the expectation they could widen on a renewed crisis of confidence.

"There could be a combination of things like fears that bank losses will be uncontrollable, combined with political arguing or separation, a feeling that central banks have lost control of the situation," Axel said. Central banks have eased funding concerns by offering cheap loan and swaps programs to banks, as well as various bond purchase programs, and as economic conditions worsen globally there are high expectations of further assistance. But many see the measures as stop gap, and say that more definitive solutions are needed from political leaders in the region. The Bank for International Settlements, a global forum for central banks, said on Sunday that leaders in the euro zone should create a banking union and warned that central banks are limited in their ability to contain the crisis."Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed," the BIS said, adding that if the root causes of financial and economic weakness are not addressed, central banks will come under pressure to do more than they can actually deliver. German Chancellor Angela Merkel said on Monday that shared debt liability within the euro zone was "economically wrong" and "counterproductive," ahead of a highly anticipated two-date summit in Brussels starting on Thursday.

Money markets rise in long term rates may be close to end


Aug 22 A recent improvement in economic data has pushed long-term euro money market rates away from their record lows, but the rise may hit a wall as they approach levels seen before the ECB cut its main interest rates in July. As short-term interest rates have held steady at ultra-low levels for months, investors and strategists are increasingly looking at derivative products that project money market rates into the future. These products are often referred to as the long end of the money market curve and have seen increased volatility recently, offering more trading opportunities. German and French data showing the euro zone's two largest economies avoided recession in the second quarter, as well as better than expected U.S. retail sales and jobs data have soothed worries about the state of the global economy. Expectations the European Central Bank will take steps to lower Spanish and Italian borrowing costs and calm the debt crisis that has driven much of the euro zone into recession has also driven money market rates higher. But analysts think developed economies will at best recover very slowly, prompting major central banks, including the ECB, to maintain easy monetary policy for a prolonged period. And a lack of detail about the ECB's plans is keeping uncertainty high about their effectiveness.

Financial products projecting the overnight euro zone Eonia rate four years into the future trade at 0.43 percent, compared with a record low of 0.2872 percent hit in late July. Three-year Eonia traded at about 0.24 percent, having risen from a record low of around 0.12 percent in July, when, in a sign of how flat the curve was, spot Eonia was at a similar level. Spot settled at 0.103 percent on Tuesday."If risk appetite is improving and there's a feeling that bad economic data is already priced in then these rates ... will be rising, but how far they can go is limited," said Vincent Chaigneau, head of fixed income strategy at Societe Generale. Long-term Eonia rates now trade just below levels seen before the ECB cut the main refinancing rate to 0.75 percent and the deposit facility rate to zero on July 5.

Max Leung, an interest rate strategist at Bank of America Merrill Lynch Global Research, said this was a sign that the rising trend may be coming to an end. PLAYING BLUES

Leung recommended investors place a bet on a drop in one-year Eonia rates starting in three years, rather than the four-year spot Eonia, due to more attractive levels. He said the rate, also known as 3y1y forward Eonia, or blue Eonias, could drop by 20-25 basis points from current levels of around 0.98 percent in the next two-three weeks. JPMorgan rate strategist Fabio Bassi also has a "bullish bias" on blue Eonias, even though he had no specific trading recommendation on them."There is a lot of event risk on the table in the next few weeks, and a lot of uncertainty about the ECB (intervention) plans," Bassi said. The ECB meets next on Sept. 6. JPMorgan expects the ECB to cut the deposit rate to minus 25 basis points in September or October and Bassi recommended betting on a fall in October-dated forward Eonia rates, now trading at around 5 basis points."The risk/reward is such that if they (the ECB) cut the deposit rate to -25bp, (October Eonia) could fall as low as minus 10. If they don't, then you only lose 4-5 basis points," he said.

Money markets spanish bank cds jumps as contagion risks spread


* CDS on debt from Santander, BBVA jump over past month* Spanish sovereign CDS also rises on fiscal concerns* ECB exit strategy seen a way offBy Ana Nicolaci da CostaLONDON, April 5 The cost of insuring debt issued by Spanish banks against default has risen sharply over the past month, as a tough budget this week did little to soothe concerns over the country's deteriorating fiscal situation. Default insurance for Santander is up 52 percent since March 1 to 393 basis points and the equivalent for BBVA jumped 54 percent over the same period. Both Spanish banks underperformed the Markit iTraxx senior financials index - which measures Europe's financial institutions' insurance, or credit default swap prices. It rose by 20 percent over the same period. Markit analyst Gavan Nolan said s lot of the moved was caused by the European Central Bank's low-interest, three-year loan programmes, or LTROs, that have pumped money into the banking system.

"They've actually tightened the relationship between the banks and the sovereign. So the banks have been buying sovereign debt and that has made their fortunes even more intertwined than they have previously," he said. Pressure on Spanish government debt has had a knock-on effect on banks. Yields on 10-year Spanish bonds this week rose to their highest since December 2011 at 5.8 percent after the Spanish Treasury had to pay more dearly to borrow in an auction. The cost of insuring Spanish sovereign debt against default meanwhile has jumped 111 basis points to 467 bps over the past month, according to Markit data. This means it costs $467,000 annually to buy $10 million of protection against a Spanish default using a five-year CDS contract.

Spain' tough budget this week has not been enough to calm investor nerves and many fear too much austerity could choke an already struggling economy where unemployment rose to a staggering 22.9 percent in the fourth quarter of 2011 - the highest in the European Union. NO EXIT After keeping interest rates steady at 1.0 percent on Wednesday, European Central Bank President Mario Draghi said it was premature for the bank to start planning a retreat from emergency crisis-fighting and that the ECB would need time to see the full impact of bumper funding operations it has used to help banks.

Several policymakers, led by the German Bundesbank chief Jens Weidmann, had said in recent weeks the ECB needs to prepare an exit strategy after the massive cash injection - comments that led to a steepening of the money market curve as markets priced in higher rates in 2013 and 2014. But Alessandro Giansanti, senior rate strategist at ING, said markets had scaled back chances of higher rates in 2014 after the meeting, with 3-month Euribor rates coming further under pressure to hit their lowest since June 2010. The bank-to-bank rate, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 0.766 percent from 0.768 percent in the previous session. Giansanti said the ECB would have to see the inter-bank market functioning again to unwind the measures it took to shore up the banking system."The peripheral banks are still not able to get money in the interbank market so they are relying too much on the ECB," he said. But with domestic banks in struggling peripheral countries increasingly leveraged with their own risky debt, such normalization may still be a way off."I think the pressure is going to continue on Spain and there's going to be more pressure for the ECB to provide further liquidity," Nolan added. "I don't think we are at the stage of an exit strategy yet."