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Money markets euribor slips as ecb cut expectations grow


* Euribor, euro Libor both fall, seen sinking further* ECB rate cut expectations stoked by Coeure commentsBy William JamesLONDON/FRANKFURT, June 21 A growing conviction that the European Central Bank will cut interest rates pushed interbank borrowing costs lower on Thursday, with markets pricing in a slide to record lows. Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending and a proxy for the direction in which the ECB's refinancing rate is headed, eased to 0.655 percent from 0.657 percent. The interbank market is awash with cash injected by the ECB, depressing Euribor rates to within 2 basis points of their lows but analysts expect rate cut speculation to drive rates lower before the next policy meeting on July 5.

The euro zone's struggling economy is putting additional stress on countries struggling with a debt crisis that currently threatens Spain's ability to raise funds from the market and is piling pressure on the ECB to act."I can't see the world changing sufficiently to derail market belief that the ECB will provide another cut," said Eric Wand, strategist at Lloyds Bank in London."Put it this way, if the ECB stays where it is, the market would take it pretty badly. It seems like a cut is in the offing."

The euro-denominated Euribor rates pushed lower after fresh hints from ECB policymakers that the bank's deposit rate could be cut, a move that would open up room for a further drop in market rates. Banks will only lend in the open market if borrowers are prepared to pay more than the ECB. ECB Executive Board member Benoit Coeure said on Wednesday in an interview with the Financial Times that rate cuts remained an option and would probably be discussed at the next meeting, but that any move would not be a cure-all.

Euribor futures edged higher with contracts dated out to the end of the year rising by around two ticks. Prices imply Euribor falling below the record of 63.4 bps by next month, reaching as low as 51 bps by December. Three-month euro Libor, fixed by a smaller panel of banks based in London, also fell to set a new low at 0.56479 percent. Technical analysis by Futurestechs showed the outlook for the March 2013 contract, currently trading at 98.465, was bullish and protected by solid support around 9 9 .34 - a rising trendline between recent lows. Expectations of a cut to the ECB deposit rate - the amount of interest paid on cash parked overnight at the bank - were reflected in the market for fixed-term Eonia. Lending at a fixed-term Eonia rate for anything longer than two months requires offering a price below the 25 basis points currently on offer at the ECB. The three-month Eonia rate was last at 21 bps.

Money markets market may price out ecb cut after inflation warning


Short-term euro zone interest rates held steady after the ECB's policy meeting on Thursday but could begin to price out the small probability of it cutting rates this year if Greece's debt swap deal proves successful. The European Central Bank said the bloc's gradual economic recovery might take slightly longer than previously thought and added that inflation might also be more stubborn. For a table of new ECB projections, seeEuribor interest rate futures <0#FEI:> and overnight Eonia rate forwards, instruments usually used to gauge market expectations of moves in ECB benchmark rates, were little changed across the 2012-2013 strip after the comments and analysts said no rate move was priced in for the foreseeable future. Markets have not reacted mostly because they were still nervous ahead of a deadline for investors to swap their Greek bonds for new ones later in the day, a vital exchange for Athens to avoid a chaotic default. But most investors saw that scenario as a marginal risk. A senior Greek government official said on Thursday afternoon that over 75 percent of bondholders with eligible Greek debt had signed up for the bond exchange, meaning the deal is likely to go through. Once that is out of the equation, rates such as Eonia forwards may move higher as analysts leaned towards interpreting ECB President's Mario Draghi's tone at his news conference as somewhat hawkish after his comments on the upside risks for inflation."Money markets have to take it on board that the prospect of a rate cut has gone down over the past hour or so," said David Keeble, global head of fixed income strategy at Credit Agricole.

"Also, they will have to do with the cash that they've got, which is ample."He said fixings of benchmark interbank rates such as Euribor and Libor should continue to grind lower, driven by the bank's injection of around a trillion euros in two rounds of ultra-cheap three-year loans. The three-month euro Libor rate fixed at 0.81429 percent versus Wednesday's 0.82400 percent. The rate has dropped by almost half-a-percentage point this year. Also sensing a slight hawkish bias in Draghi's tone, Societe Generale's head of fixed income strategy Vincent Chaigneau said some of the Eonia forward rates across the 2012 strip might be too low.

"He was probably slightly on the hawkish side ... in particular he upgraded the inflation risks," Chaigneau said. "It would take a better outlook on growth for the curve to steepen, but maybe there's a bit of room in the September Eonia.""0.31 percent is slightly on the low side given that in the February MP (maintenance period) it averaged 0.36 percent. There is still a small probability of a cut priced in ... but the focus now is on the Greek (debt restructuring deal)."Banks are required to keep a certain level of cash with the ECB over the course of a roughly one-month maintenance period.

LIQUID AND CAUTIOUS The ECB has flagged its ample cash injections as a success and said things would have been much worse without the extra funds. But traders say interbank lending activity has not picked up markedly and many remain unconvinced that the worst for the euro zone is now behind."The financial system is incredibly stressed ... you've got to stay ultra cautious, ultra-liquid," said Peter Allwright, head of absolute rates and currency at RWC Partners, which has $4 billion under management. He said the front end of the core European yield curve was going to remain bid as investors remained worried about the risks the euro zone still faced and banks wanted top-quality collateral to secure their liquidity needs."Stay long in the front-end core markets," Allwright said. "It's a good, triple-A, high-quality collateral and there's a massive shortage of that ... I can easily see two-year Schatz yielding negative during the next round of stress."He mentioned poor economic data, high oil prices, the Greek and French elections as future potential crunch points that would increase stress in financial markets.

Money markets repo rates seen higher near term


Feb 6 U.S. overnight repo rates eased on Monday but are likely to remain relatively high in the near term as money market funds reduce loans in the asset class and short-dated supply increases. Overnight repo rates traded at around 13 basis points on Monday, down from around the high-20 basis point area last week. Repo rates have been pressured higher in recent weeks by dealers adding to already large inventories of collateral that need to be financed by purchasing short-dated debt from the Federal Reserve as part of its Operation Twist program. U.S. money funds have also been reducing loans in repo as increasing risk appetite leads investors to withdraw from the ultra safe funds, and as the money funds tentatively return to bank lending through commercial paper and certificates of deposit."We're seeing money funds reallocate money out of the overnight repo market and into bank credit," said Kenneth Silliman, head of short-term rates trading at TD Securities in New York.

"The thawing of bank credit happened at a time when dealers were also trying to absorb an exceptionally high amount of paper," he added. The Fed is expected to sell another $200 billion in short-dated debt as part of Operation Twist, according to Barclays Capital. The program involves selling short-dated debt to fund longer-dated purchases that the Fed hopes will reduce long-term borrowing rates.

The Treasury has also been unexpectedly increasing the size of its Treasury bill auctions. One-month bill rates saw a slight backup on Monday after it said it will sell $37 billion in four-week bills, up from previous one-month sale of $33 billion. The U.S. also sold $31 billion in six-month bills on Monday at yields of 10 basis points, the highest level since August. Money funds are continuing to see fund redemptions, which is leading them in turn to reduce repo lending.

Money fund assets have fallen by around $50 billion from January 11 through early February, according to the Investment Company Institute."That certainly takes its toll," said TD's Silliman. "When funds see those decreases, rather than selling paper those decreases come out of the most liquid assets and a lot of times that's overnight repo."Interbank lending rates continued to ease on Monday, based on the benchmark three-month dollar London interbank offered rate. The Libor rate dropped to 0.52325 basis points and is down from over 0.58100 basis points at the end of the year. The premium charged to swap three-month euros into dollar loans was relatively steady at around 0.75 percent, down from recent highs of around 1.60 percent but still higher than the 0.40 percent area where the swap had traded in mid-2011 before fears over Europe flared.

Money markets short term rates edge lower after bank lending data


* Money supply data shows lending to corporates shrinks* Euribor futures bounce from session lows after the data* Concerns rise about banks' government bond holdingsBy Marius ZahariaLONDON, March 28 Short-term interest rates inched lower on Wednesday after data showed the glut of cash injected by the ECB has yet to find its way through to the real economy, reinforcing bets that monetary policy will remain loose for a long time. The monthly flow of loans to non-financial firms fell by 3 billion euros in February after rising by just 1 billion euros in January. Euribor futures rose by around 3 ticks from session lows across the curve after the data, reflecting expectations for easier monetary conditions going forward. Market participants said the move reflected that markets now expected any ECB exit strategy will be activated later than previously thought rather than increasing bets for an interest rate cut or more liquidity injections.

"The huge amount of liquidity not only in the euro zone, but also in the U.S., UK and Japan means that the level of yields in bond markets is quite low and this is leading the corporate sector to go to the market for funding, (and rely) less on bank lending," BNP Paribas rate strategist Patrick Jacq said."There is no hurry for the ECB to ease or exit."A Reuters poll showed the ECB was expected to keep rates on hold in the foreseeable future. At the same time, data showed Italian and Spanish banks used the cheap loans from the European Central Bank to stock up on domestic government bonds, increasing their dependency on the sovereign's ability to fight the debt crisis.

The new data, which captured the period just before ECB's record second injection of 3-year cash, showed Italian banks increased their holdings of euro zone debt by 23 billion euros, taking their total holdings to 301.6 billion euros. Spanish banks increased their holdings by a hefty 15.7 billion euros. While the rise was smaller than January's record 23 billion, it left total sovereign holdings at a record 245.8 billion euros. JPMorgan estimates the holdings of government bonds as a percentage of total banking assets is now around 8 percent for both Italy and Spain, which is the highest in the euro zone after Greek banks, whose government debt represents 10 percent of total assets.

"It's a big figure ... If at some point we have a reignition of worries about the sovereign, banks will suffer massively," said Nikolaos Panigirtzoglou, European head of global asset allocation and alternative investments at JPMorgan."What destroyed Greek banks was not the fact that their equity was wiped out, was not ... their loan book, it was their government securities."Meanwhile, in a further sign that dollar funding conditions have eased, banks borrowed only $6.25 billion for three-months, compared with $25.5 billion."This reduction in the usage of the ECB's dollar facility is not surprising, given that private markets are more readily providing dollars," said Elaine Lin, rate strategist at Morgan Stanley. The three month euro/dollar cross-currency basis swap , which shows the rate charged when swapping euro rate payments on an underlying asset into dollars, kept close to its tightest since August 2011 at around minus 55 basis points. The measure, which widens in times of funding stress when investors compete for dollars, has gradually tightened from November's minus 167.5, a level not seen since the aftermath of Lehman Brothers' collapse in late 2008.

Money markets signs appear that ecbs zero rate move may work


The European Central Bank's cut in its deposit rate to zero may be slowly breathing life into euro zone unsecured money markets, though the evidence is far from conclusive. After a slight dip in August, mainly due to seasonal effects, volumes in the euro zone overnight Eonia rates market have inched higher this month and on one day last week topped 30 billion euros for the first time since April. This, to some analysts, is a sign banks are widening the list of counterparties they choose to lend to as record low rates prompt them to take more risk to increase returns on their cash."What we're seeing is that some of the high-quality banks have started to lend to lower quality banks. In order to get some remuneration they are willing to take more risks," said Barclays Capital rate strategist Giuseppe Maraffino. Daily average Eonia volumes for September are 25.7 billion euros, compared with 20.9 billion in August, 23.7 billion in July and 23.5 billion in June, according to Reuters data. In September 2008, before the financial crisis froze interbank lending, daily Eonia volumes reached more than 70 billion euros. The data diverges from volumes seen in the equivalent overnight Euronia rate, which is arranged by a much smaller panel of top-rated money brokers.

Since just before the ECB's July's deposit rate cut, volumes in Euronia have shrunk almost three-fold to just below 3 billion euros, according to Barclays data. Euronia last fixed at -0.0017 percent, compared with 0.095 percent for Eonia. The Euronia data suggests that trade among top-rated money market players are shrinking in volume while the Eonia data suggests some of those players may be lending to perceived lower-rated counterparties."This is a very encouraging sign. If the improvement in market sentiment continues, (Eonia) volumes should continue to rise," Maraffino said.

Euronia is fixed in the UK by the Wholesale Markets' Brokers Association, while Eonia is calculated in Frankfurt by the European Central Bank. TOO EARLY TO TELL However, there is an important shortcoming to the hypothesis that banks are beginning to expand the list of lenders they want to do business with again -- the fact that usually banks need more cash for window-dressing before the end of a quarter.

"There is more lending going on and this is consistent with the overall developments in markets," Commerzbank rate strategist Benjamin Schroeder said, referring to an increase in investors' appetite for risk following the ECB's rate moves and its pledge to buy potentially unlimited amounts of government bonds."But it may also be related to quarter-end activity so I don't know if we should read too much into these volumes at this stage," Schroeder added. A turn for the worse in general sentiment is also possible, with investors uncomfortable with the fact that Spain, at the forefront of the euro zone crisis, appears reluctant to ask for a bailout and activate ECB bond-buying. Outside interbank markets, some money market players have also noticed an increase in demand for cash products."We see continued growth (in demand for) assets up to one-year," said Shahid Ikram, chief investment officer at Aviva Investors in London."Zero-rate policy from central banks has meant that corporates and banks have been able to issue very efficiently and there has been significant demand for that."