Personal finances, Economic and Trading | Finance news

Money markets early ltro payback poses no threat to low rates

* ECB loan repayment to add little upward pressure to Eonia* Cash surplus high enough to dull impact of any paybacks* Repayments may signal strength, drive lending rates lowerBy William JamesLONDON, April 3 Euro zone money market rates are likely to stay pinned at rock-bottom levels for years by the weight of cheap ECB cash in the system, even if banks choose to repay the central bank loans early. The European Central Bank pumped a trillion euros of three-year loans into euro zone financial institutions in two Long-Term Refinancing Operations (LTRO) in response to growing fears that banks would struggle to refinance their debt against the backdrop of the sovereign crisis. In addition to driving Italian and Spanish bond yields lower, as banks used the funds to buy sovereign debt, the huge surplus of cash has flooded money markets, cutting overnight Eonia rates in half and the benchmark Euribor lending cost to a 21-month low.

Against this more positive backdrop some banks have been able to raise long-term funds in the capital market to pay down their debt, and could opt to show strength by repaying the ECB cash early and funding themselves through the open market."We estimate around 110 billion was borrowed for refinancing. If the capital markets are open for banks they might not replace their maturing bonds with ECB borrowing and that money will be eventually returned," said Nikolaos Panigirtzoglou, strategist at JPMorgan in London. But, given the enormous 777 billion euro excess of cash in the system, even if some banks choose to repay the loans at the first available opportunity early next year, rates are likely to remain at or below their current artificially suppressed levels."Even if perhaps 100 billion is being repaid I don't think that is going to have a major impact on the short end of the curve," said Elwin de Groot, market economist at Rabobank.

"There's so much excess liquidity Eonia rates will stay close to where they are almost whatever happens."Eonia fixed at 0.347 percent on Monday, and one-year equivalent rates were less than 2 bps higher, indicating few in the market expected a liquidity withdrawal substantial enough to squeeze money supply and push rates up. JPMorgan's Panigirtzoglou said that even a repayment of 300 billion euros would probably only lift the Eonia fixing by 5 to 10 basis points.

Longer-term interbank rates could actually fall further if banks choose to repay early, signalling a sooner-than-anticipated revival in confidence, analysts said."If this is viewed as a positive signal, it means that confidence is returning and banks will look to increase the maturities (of lending) in the interbank market - and that will lead to a fall in risk premiums," Rabobank's de Groot said."To some extent that is exactly what the LTRO was aiming for."However, with the risks of a flare-up in the euro zone crisis far from extinguished, analysts said it was too soon for banks to commit to early repayment, as they may need to invest the cash in sovereign bonds to keep their governments afloat."There is still a lot of buying to be done by Spanish and Italian banks if they are willing to support their sovereign. A lot can happen between now and next February - they might need to buy even more than we currently think," Panigirtzoglou said.

Money markets euribor rates to extend slide; ecb seen on hold

* Euribor rates hit 16-month low; may fall to record* ECB not expected to announce liquidity, rate moves* March Euribor futures contract prices look too low -RBSBy William JamesLONDON, March 5 Euro zone interbank rates should extend their slide towards record low levels thanks to the ECB's boost to banking sector liquidity, but Thursday's central bank meeting is not expected to add to the pace of decline. After pumping 1 trillion euros of three-year loans into banks, the European Central Bank is expected to maintain its 'wait-and-see' stance towards interest rates and future cash injections at its monthly policy meeting. Until recently, many had forecast lower ECB rates to combat a slowdown caused by the euro zone's debt crisis, but those expectations have been slashed according to a Reuters poll of economists. Nevertheless, with banks' funding problems neutralised by the long-term cash and investor appetite for riskier assets increasing, Euribor rates - a gauge of interbank funding costs - look set to drop further towards all-time lows. Three-month Euribor fixed at a fresh 16-month low of 93.4 basis points on Monday. The rate has fallen every day since Dec. 19, declining by nearly 50 bps in that period.

Euribor futures showed the rate was forecast to be 82 bps at the March contract expiry on March 19. However some say the contract's value, which rises when market expect lower rates, could rally further."We like positioning for upside in March (20)12 Euribor futures," RBS strategists said in a research note."There is much more cash in the system versus the aftermath of the first three-year LTRO allotment, so the pace of Euribor decline is likely to remain lofty."

Further along the Euribor curve, rates were seen falling as low as 64 bps by September - a move which would test the record low of 63.4 bps hit in late March 2010."The trend is quite dominant and there's no sign whatsoever that the trend towards lower Euribor fixings is ending any time soon," said Kornelius Purps, strategist at Unicredit in Munich. LOW ECB EXPECTATIONS

However, the ECB was not expected to add momentum to the Euribor slide by cutting rates or announcing fresh plans to boost banking liquidity."There is currently no need or pressure to come up with a cut in key interest rates and I do not expect any announcement in terms of special tenders," Purps said."We have the two (three-year ECB ) tenders out now, and markets have calmed down considerably."Analysts expected the central bank to highlight signs of a stabilising, albeit weak, economic outlook to keep rates at 1 percent. In addition the risk of higher inflation than previously expected had grown due to a spike in oil prices. JPMorgan and Royal Bank of Scotland economists have revised their forecasts to a 'no change' from the ECB on interest rates, having previously forecast a 25 basis point cut."For the money markets there isn't any strong event risk," said Simon Smith, chief economist at FxPro in London.

Money markets euribors rise on rate cut, lending to remain dry

* Euribor futures rise on refi rate cut* Deposit rate cut weighs on Eonia rates* Rate reductions seen having limited impact on lending, economyBy Ana Nicolaci da CostaLONDON, July 5 Euribor futures rose on Thursday after the European Central Bank cut its interest and deposit rates in a bid to shore up a flailing economy and a struggling banking system. The ECB cut its main refinancing rate by 25 basis points to a record low 0.75 percent, as expected, after a recent bout of downbeat economic data suggested the euro zone debt crisis was even taking a toll on Germany, the bloc's biggest economy. The monetary authority also reduced its deposit rate to zero from 0.25 percent, putting pressure on Eonia rates and making it less attractive for banks to park their cash at the central bank overnight. The move was considered symbolic only days after a European Union summit agreed to a more flexible use of the euro zone rescue funds - surpassing market expectations and offering euro zone debt markets fleeting respite. But the rate cuts are expected to only have limited impact on the real economy and on banks' willingness to lend to each other again, analysts said."Economic data recently were very weak and after the European summit which had been received positively by the ECB, it was clear that (ECB President Mario) Draghi and the ECB wanted to reciprocate," Matteo Regesta, strategist at BNP Paribas, said.

Business surveys this week suggested the euro zone economy contracted between April and June, while data showed unemployment in the currency bloc hit a new euro-era high in May."The ECB expects (the deposit rate cut) to encourage banks to lend cash to the broader real economy as they don't get remuneration anymore from lending to the ECB," Regesta said. "That's the idea, whether they do it is another thing."Euribor futures rose across the curve after the rate decision and stood between 5 and 9.5 basis points on the day across September 2012 and December 2014 contracts. Euribor rates were traditionally used as a gauge of interest rate expectations but excess liquidity in the market from two injections of long-term cash from the ECB has made it more difficult to use them as such. Analysts who took a shot at it said the move in Euribors was a readjustment after the rate decision and markets were not currently pricing in any further monetary easing.

EURO SLUMPS In theory, a cut in interest rates would stimulate lending by making it cheaper for banks to borrow from the ECB at refinancing operations, and a reduction in the deposit rate would make them more willing to lend to each other instead of placing their money at the ECB overnight. A rate cut in the deposit rate to zero - which acts as a floor to money market rates - put downward pressure on Eonia rates and Eonia forwards.

In practice, analysts do not expect bank lending to normalize because banks are still worried about each other's exposure to risky sovereign debt. Some also think zero percent returns at the deposit facility would not be enough to discourage them from parking their money at a safe place like the ECB in the current environment."The cost of borrowing for banks at the ECB operations has dropped because the cost of borrowing at the ECB is basically (based on) the refi rate ... so banks now have to pay a lower price for the ECB liquidity," Giuseppe Maraffino, strategist at Barclays, said. This was positive for peripheral banks, but may not be enough to boost lending, he said:"There is a problem of balance sheets ... I don't think these measures will support lending to the economy by banks."The rate cut could help the real economy by weakening the euro and boosting exports, Regesta added. The euro slumped against a range of currencies on Thursday and hit a one-month low against the dollar after the ECB rate decision. Others in the broader market were disappointed that the ECB did not opt or hint at more dramatic measures such as buying government bonds or flooding banks with fresh liquidity. Spanish and Italian bond yields spiked as a result.

Money markets fall in financial stress levels seen short lived

* Interbank stress measures fall but still elevated* Trader sees value in betting on FRA/OIS spread widening* Eonia forwards pricing in rate cut in March-analystBy Ana Nicolaci da CostaLONDON, Jan 11 Interbank euro zone lending rates fell on Wednesday and were seen remaining low on the back of excess liquidity in the financial system, but, without a resolution to the debt crisis, financial stress measures should resume their rise. The injection in December of nearly half a trillion euros into the financial system, which will be followed by more 3-year loans in February, has taken overnight Eonia rate and interbank Euribor and Libor rates sharply lower. While the abundance of cash has alleviated the immediate threat of a liquidity squeeze among euro zone banks, it has done little to solve the region's underlying problems, analysts say. As a result, banks remain reluctant to lend to each other, depositing a record high amount at the ECB overnight for a fourth session running.. Any flare-up in the crisis would be enough to send measures of counter-party risks higher again, analysts said. The auctions in Spain and Italy, Italy's refinancing needs in the first quarter and Greek debt negotiations were all potential trigger points, said Richard McGuire, rate strategist at Rabobank.

"The concern of a European institution succumbing to a liquidity crunch ... has obviously been much reduced in the wake of the ECB's liquidity provisioning but the concern still remains as regards to the euro crisis more broadly, the ability of peripheral governments to finance themselves, how much of this liquidity will make its way to peripheral coffers," he said."At the moment we are travelling in hope so I wouldn't fight the current tightening of Libor/OIS and an improvement in the broader gamut of risk measures over the near-term. But I equally wouldn't position myself for such because I still see considerable risk that the crisis tensions do flare up at some point in the not too distant future."Euro zone interbank lending rates, or three-month euro Libor rates, fell to 1.19929 percent from 1.20929 percent in the previous session. The spread between three-month euro Libor rates and overnight indexed swap rates -- an indicator of financial stress - was at 85 basis points. That was down one basis point on the day but not very far from 93 bps hit in December -- its highest since March 2009.

The spread between three-month Euribor rates and overnight indexed swap rates stood at 90 basis points in intra-day trade. In December, it hit its highest since February 2009 at around 100 basis points."The spread Euribor-Eonia is still quite elevated, I don't see a big reduction in the spread. So it means that there is still a lot of stress in the market," Alessandro Giansanti, senior rate strategist at ING."To have a robust tightening, we need a solution in the govvie (government bond) crisis. Until we have a solution ... we risk to see a widening again in the spread."

In another sign that some expected stress levels to remain high, one trader said people had kept bets on a widening in the spread between forward rate agreements versus overnight rates , a forward-looking measure of counterparty risk."We don't see any evidence they are taking those off because it is still a positive carry trade and for the investment community it looks like it could be a pretty low, volatile, good carry trade for the coming months," the trader said. "People are still happy to be putting wideners on."Excess liquidity kept Eonia and Euribor rates under pressure, making it increasingly difficult for investors to use these instruments as a gauge of interest rate expectations. But Giansanti said Eonia forward and Euribor markets were fully pricing in a 25 bps rate cut in March. That was in line with a Reuters survey that expects the next rate cut to be in February or March. The ECB announces a rate decision on Thursday but is widely seen keeping them steady at 1.00 percent. Three-month Euribor rates fell to 1.257 percent, the lowest since early April and down from 1.267 percent the previous day. Eonia rates on Tuesday stood at 0.37 percent, not far from the ECB's overnight deposit rate of 0.25 percent.

Money markets longer term implied rates up on growth optimism

Euro zone interest rate futures fell further on Friday , implying higher long-term official rates, but bets the European Central Bank might hike rates at the turn of the year looked overdone as some southern euro zone states face recession. Improved U.S. and German economic data as well as a positive stress test score card from the Federal Reserve for most large U.S. banks spurred bets this week that central banks could start raising interest rates sooner than 2014, as initially expected. The Euribor curve maintained its steepening trend, with the front end of the 2012 strip anchored by the avalanche of cheap ECB cash while 2013-2014 contracts fell five to 11 basis points, anticipating official rates will go up over the longer term. The Eonia strip is now pricing in a marginal probability of an ECB rate hike in December but many in the market say these moves could wane in coming days as they were led more by U.S. data than by a structural shift in the outlook for the euro zone.

"What's going on is basically market players trying to double-guess whether relatively strong data from the U.S. can have an impact on global growth and on the euro economy as well," said BNP Paribas strategist Matteo Regesta."For us the curve steepening is not truly reflective of ECB expectations. We attach a very low, if not zero probability the ECB will raise rates in December. Liquidity is still huge, Italy is in recession, Spain and Portugal are not in good shape."

Barclays Capital also expects the ECB to hold interest rates steady well into 2013, with the abundant liquidity keeping downward pressure on interbank rates in coming months. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and interest rate expectations, continued to fall on Friday, to 0.853 percent from 0.862 percent - the lowest level since July 2010.

Euribor rates have dropped by more than a third over the last few months on the back of the flood of three-year loans the ECB has injected into the banking system since December. The three-month rates are still well above the low of 0.634 percent they hit in early 2010, indicating there's still room for them to grind lower. Rates in longer-term maturities also dropped. Six-month rates fell to 1.158 percent from 1.168 percent and 12-month rates dropped to 1.495 percent from 1.505 percent. Overnight rates fell to 0.356 percent from 0.363 percent as banks frontloaded funds to meet ECB cash requirements at the start of the new maintenance period."The banking system is still flooded with excess reserves. One-month EONIA swaps around 0.36 percent indicate that money markets are not expecting much change either," Commerzbank strategists said in a note. "If anything, EONIAs have edged slightly higher since last week, implying that average fixings are not seen significantly below 0.35 when looking even further ahead."

Money markets sub zero depo rate bets linger but likely overdone

Euro zone money markets still see a slim chance the European Central Bank could cut its deposit rate below zero in coming months but such moves could be overdone given doubts over its efficacy in spurring interbank lending. The ECB left its refinancing rate and the interest it pays banks for using its overnight deposit facility unchanged at 0.75 and zero percent respectively at its policy meeting on Thursday as it prepared to embark on a new bond buying scheme aimed at tackling the euro zone debt crisis. This led markets to slightly scale back expectations of when they expect the ECB to further cut rates. Forward euro overnight Eonia rates, the best gauge for money market expectations of future moves in the ECB's overnight deposit facility rate, are trading as low as 4 basis points for January. This indicated a 25 percent chance of a cut to sub-zero in the deposit rate by the beginning of next year, according to BNP Paribas calculations. A negative deposit facility rate implies a penalty that the ECB would charge banks for parking their cash safely at the central bank instead of lending to each other or to businesses in the real economy.

Analysts said such an unprecedented step now looked unlikely as the ECB still needed to assess the impact of a zero deposit rate which has come under criticism as the non-existent returns have led some big U.S. money managers to restrict access to European money market funds."The ECB itself still hasn't seen the full implications of having a zero depo rate ... so I'm cautious and the market should not run ahead of itself to price in a negative rate," BNP Paribas Matteo Regesta said."The risk of impairing to a serious degree the money market by putting the depo into negative territory and squeezing further money market funds will probably lead the ECB to leave the depo rate at zero. I don't see any benefit to putting the rate below zero."


The move by the ECB to stop paying interest on banks' deposits has prompted them to make stronger use of the current account facility, which still pays 0.75 percent interest for the required reserves. A total of 342 billion euros was parked in the ECB's deposit facility overnight, latest data showed, down from levels above 800 billion seen before the bank cut the rate to zero in July. Banks' current account deposits at the ECB stood at 535 billion."The problem you have in the interbank market is one of fragmentation and while the ECB's bond purchase plan could help in stabilising markets, it may take a while and more than that for banks to rebuild confidence in each other," a money market strategist said. Commerzbank analysts said the inversion of the forward EONIA curve, where the rates are at their lowest at 4 bps in January/February while flirting around 6-7 bps in the rest of the 2012 strip appeared exaggerated as they still consider a negative depo rate a remote possibility."At these levels, however, the favourable risk-reward in paying EONIA forwards we suggested before is diminishing," they said in a note.