Euribor lending rates hit their lowest level since October 2010 on Thursday and were likely to fall further after the European Central Bank injected another bout of cash into the financial system to restore confidence in the struggling banking sector. Banks snapped up 530 billion euros at the ECB's second offering of cheap three-year funds on Wednesday. The extra liquidity will not solve the underlying debt problems in the euro zone, especially as banks increasingly hoard the cash, but it should stave off a credit crunch. The abundance of cash is expected to push key measures of interbank financial stress towards levels seen before the ECB began buying Italian and Spanish bonds in August 2011 to cap a surge in funding costs as market worries about peripheral euro zone debt escalated. Three-month Euribor rates fell to 0.967 percent from 0.983 percent, hitting the lowest level since October 2010. Simon Smith, chief economist at FxPro, expected the spread between 3-month Euribor and overnight Eonia rates, a measure of counterparty risk, to fall to about 40 basis points by May from around 62 bps currently. The spread was at 35 bps at the beginning of August."It is more likely that we find a floor to that spread in its convergence with those of other major markets, such as the dollar market," Smith added. The U.S. dollar Libor/OIS spread stood at 41 bps.
But Smith also stressed that the euro zone's underlying problems remained."The first round (of LTRO) was all about removing the tail risks of a full-scale credit crunch in Europe and it was successful in doing that and reducing the fears about bank refinancing needs ... I think there is a lot more uncertainty with regards to where this one is headed," he said. Alessandro Giansanti, senior rate strategist at ING, said the improvement in funding conditions resulting from the ECB's second three-year long-term refinancing operation (LTRO) could take the Euribor/OIS spread to 30 to 40 bps over the next month.
That would be the floor, he added, because investors would still require a premium for lending cash for three months as opposed to overnight. The overnight Eonia rate at 0.37 percent could not fall much further given it was already close to the 0.25 percent rate offered by the ECB deposit facility, he said. REAL ECONOMY The ECB's liquidity boost has helped stabilise the banking sector and eased tension in financial markets but has yet to filter through into the real economy.
Indeed, ECB President Mario Draghi urged banks on Sunday to help strengthen economic growth by lending the money they borrow from the central bank at very low rates to euro zone households and businesses. The euro zone's manufacturing sector contracted for the seventh straight month in February, a business survey showed on Thursday. Many fear the austerity measures aimed at reigning in debt levels could choke growth. Meanwhile, the huge cash boost for euro zone banks was a factor behind economists' decision to reverse their forecasts for interest rate cuts this year. The ECB is now expected to keep rates on hold at 1.0 percent until deep into 2013, a Reuters poll of economists showed on Thursday."I think (the ECB is) in the realms of liquidity versus interest rate cuts," a trader said. "If the ECB cuts by 25 bps, will the banks pass it on? Probably not. So why do it?"Euribor futures are pricing in no rate cut in March and a 50 percent chance of a 25 basis point rate cut in June, Giansanti added. That was little changed from market expectations before the LTRO, he said, because that had been widely priced in already.
* Euro/dollar 3-month FX basis widens, but move seen brief* Euro interbank rates hit fresh 16-month lows* Deposits with the ECB spike as expectedBy Marius ZahariaLONDON, March 2 One measure of dollar funding costs rose on Friday after ECB loans in the U.S. currency expired, but a glut of cash in the banking system should ensure a falling trend resumes. The three month euro/dollar cross currency basis swap , which measures the cost of swapping euro interest payments on an underlying asset into dollars, hit its widest in five weeks at minus 82 basis points. This follows Thursday's expiry of the ECB's first allotment of three-month unlimited dollar loans on Dec. 7, when banks took over $50 billion."The three-month dollar tender is rolling off, this is why we're seeing the move (wider) today, not because of any inherent market tensions," said UBS currency strategist Geoffrey Yu, adding that he expected the euro/dollar basis to resume its tightening trend soon.
The basis is often used as an indicator of how hard it is for European banks to borrow dollars. The cost shot up to its widest in two years at minus 167.5 bp in late November, before the ECB's first offer of cheap 3-year funding calmed market nerves about the euro debt crisis. Yu said he "wouldn't be surprised" if some European banks swapped into dollars some of the half a trillion euros they borrowed at the ECB's second three-year tender on Wednesday, but the volumes would be low. The three-month interbank dollar Libor rate fixed an touch lower at 0.47575 percent from 0.47970 on Thursday. Equivalent euro rates also fell to 0.86114 percent from Thursday's 0.87893 percent, the lowest level in 16 months, driven down by lower demand for cash after the ECB's massive injection.
DEPOSITS AT ECB RISE Most of the new money ended up back with the ECB, with overnight deposits rising to 777 billion euros from 475 billion euros in the previous day, when the ECB cash entered the system.
The increase is similar to the net additional liquidity after Wednesday's three-year cash tender, which analysts calculate at around 310 billion euros. A persistently high figure in the deposit facility would indicate that the new money is not filtering through to the real economy, as the ECB hopes. The number is, however, unlikely to offer convincing clues on how much money banks are spending on short-dated euro zone government bonds, which rallied sharply after the ECB's first liquidity tender, easing concerns about Europe's debt crisis."Even if they started selling these bonds now, the cash proceeds would still be in the system ... and will still show up in the deposit facility," said Benjamin Schroeder, rate strategist at Commerzbank."Only if somebody withdraws it from the system would you see the number falling."Lending to businesses in the real economy depends on how confident banks are that they will be able to find money in the market, rather than at the ECB, whose support is only temporary, analysts say. But their incentive to test their market access is lower now, given that the system is awash with cash. For instance, volumes used for the unsecured overnight Eonia rate fixing dropped to 24 billion euros on Thursday, compared to 32 billion euros on Wednesday and 39 billion euros on Tuesday.
* 3-mo Libor rate eases* 3-month euro/dollar cross currency basis swap narrows* U.S. money funds bank more aggressively on EuropeBy Ellen FreilichNEW YORK, March 21 After pricing out some of the expectations for a third round of quantitative monetary easing, some U.S. interest rates eased a bit on Wednesday, but in the interbank lending market, three-month Libor eased after having been flat for several days. The benchmark three-month London Interbank Offered Rate (LIBOR) fixed at 0.72357 percent on Wednesday, down from 0.73214 percent on Tuesday. The three month euro/dollar cross currency basis swap , another gauge of dollar funding risk, narrowed to minus 58 basis points, the tightest in nine months.
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. The relaxation was said to be tied to good economic data, especially from the United States, and optimism among some investors about euro zone sovereign debt. Three-year loans from the European Central Bank (ECB) have also contributed mightily to alleviating worries about counterparty risk. After a week of mainly adding risk, investors tried the reverse tack on Wednesday with global stocks drifting lower and safe-haven government debt prices rising. Last month, however, the latest period for which data was available, figures on taxable money funds showed those funds ready to participate a little more aggressively on Europe.
Money fund holdings of French bank deposits, commercial paper and repo increased by 14 percent, returning to their October level. Since these holdings troughed in December, French bank exposures have increased by 72 percent, but are still half what they were in May 2011, said Barclays Capital market analyst Joseph Abate."After reducing their exposures too far, money funds appear to be looking for a 'happy medium' between the two extremes," he said.
Scandinavian, German, and UK holdings by money market funds were largely unchanged in February. Weighted average maturities of money fund European bank exposures also lengthened in February, consistent with overall market "risk on" sentiment, Abate said. As firms lock in low rates by borrowing for longer periods, the weighted average maturity on commercial paper outstanding has lengthened to 47 days from 39 in September, he said. As interbank lending rates have eased, money fund investors looking for returns benefited from increases in overnight repo rates from January's single-digit basis points to the low teens to mid-20s. The rise in repo rates combined with managers' willingness to extend average maturities has contributed to a marginal rise in money market yields, analysts said."Clearly, investors and businesses are growing more comfortable with the course of events, not just in the United States, but in Europe," Deborah A. Cunningham, chief investment officer for the taxable money markets and senior portfolio manager at Federated Investment Management Company, wrote in an analysis published earlier this month."On an historical basis, the current inflation rate combined with improving economic fundamentals would indicate the federal funds target rate easily could be 1 percent, or even 2 percent, and still be considered very accommodative," she said. "Indeed, in any other environment, a 1 percent target funds rate would seem extremely low. Now, it would seem like nirvana."
* Cash dollar funding rates steady to higher* Deferred U.S. interest rates futures rise* Payroll data may reinforce view of no QE3 soonBy Richard LeongNEW YORK, April 5 The short-term U.S. interest rates market sent conflicting signals on Thursday on traders' views on the direction of borrowing costs and Federal Reserve policy in advance of Friday's government payroll report. The increase in the interest rates on repurchase agreements (repos) and federal funds, as well as a drop in nearby interest rates futures on Thursday, suggested some nervousness that stronger-than-expected jobs data would further reduce the urgency for the Fed to embark on a third round of large-scale bond purchase, known as QE3, in a move to stimulate the U.S. economy, analysts and traders said."It's the possibility of no more stimulus," said Todd Colvin, senior vice president of global institution sales at R. J. O'Brien and Associates in Chicago. Ultra short-term dollar funding costs also edged up as Wall Street dealers scrambled to finance the Treasuries debt they bought at last week's auctions before a holiday weekend.
More supply is on the way. The U.S. Treasury Department said on Thursday it will sell $66 billion in longer-dated government debt next week."It's cost more for them to finance them," Colvin said. The U.S. bond market will close early at noon (1600 GMT) on Friday ahead of the Easter holiday. On the other hand, latter fed funds and Eurodollar futures beyond late 2013 rose on some traders betting that the central bank would implement more measures to support U.S. growth, which remains sluggish due to high unemployment and a fragile housing market, traders said.
The grab for these deferred contracts was also due partly to some traders who see more value in them than the nearby contracts since they gave up on the notion that QE3 would happen soon, analysts said."There is not an endless wall of cash at the front end of the curve," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York. The Fed's minutes on its March policy meeting, released on Tuesday, showed most policy-makers were still worried about the economy, but suggested fewer of them wanted the Fed to enact more stimulus soon.
Friday's payrolls data could reinforce that view on the Fed if the payroll data come in stronger than expected. The median forecast on the March U.S. payroll figure is for a 203,000 increase, while the consensus reading on the March jobless rate is 8.3 percent, according to 72 economists recently polled by Reuters. The U.S. Labor Department will release its nonfarm payroll survey at 8:30 a.m. (1230 GMT) on Friday. In repo trading, which is what banks and bond dealers charge each other for overnight loans secured by Treasuries, the overnight rate was last quoted at 0.26 percent mid-market, up from 0.23 percent from late Wednesday. In the fed funds market, whose rates the Fed monitors closely, the cost for banks to borrow excess reserves from each other overnight was last bid at 0.15 percent, unchanged for a second day. In the futures market, fed funds futures for delivery through April 2013 closed unchanged to 0.5 basis point lower, while those for delivery beyond April 2013 finished up 0.5 basis point to 4.0 basis points. Eurodollar futures through June 2013 ended mostly down 1.0 basis point to 1.5 basis points. Those contracts beyond June 2013 closed 0.5 basis point to 9.0 basis points higher.
* ECB to allow measures to have effect* Spanish pressure spreading to corporate creditBy Kirsten DonovanLONDON, April 4 Euro zone money market rates are set to stay at rock bottom levels after ECB President Mario Draghi said on Wednesday it was premature to talk of an exit from the bank's unconventional monetary easing policies. The European Central Bank held interest rates at a record low 1 percent, waiting for support measures take full effect and support an increasingly shaky recovery. . Several policymakers, led by the German Bundesbank chief Jens Weidmann, have said in recent weeks that the ECB needs to prepare an exit strategy after pumping about 1 trillion euros of cheap three-year funds into the financial system since December. But the euro zone debt crisis is showing signs of flaring up again with Spain in the firing line on concerns over the country's ability to meet budget targets. Spanish borrowing costs jumped at a bond auction on Wednesday and the country only sold 2.6 billion euros of debt, the lower end of the target range.
"Keeping in mind what is going on in the periphery with Spain increasingly in trouble and the effect this could have on banks and the like, for the time being the bias is rather towards a further easing of policy - be that standard or non-standard - rather than exit policies," said DZ Bank rate strategist Michael Leister. Euribor futures <0#FEI:>, which reflect interest rate expectations are more or less flat throughout 2012, reflecting no near-term expectations for a change in monetary policy. But with upbeat macro-economic data out of the U.S. and receding expectations for more monetary easing in the world's largest economy, the comments from Weidmann and others led to a steepening of the money market curve as markets priced in higher rates in 2013 and 2014. That has already been partially reversed and may reverse further.
"I don't think that (Draghi) should really start to discuss the exit strategy after he's only just put the thing in place," said David Keeble, global head of rates at Credit Agricole."It's certainly a discussion for six months rather than for today."Draghi said it would take time to see the full impact of the ECB's longer-term operations, but that banks still needed to take steps to strengthen their resilience further. Separately, a top official at Italy's central bank said the country's banks had not used the more than 250 billion euros they took from the ECB's three-year financing operations to increase lending to companies and the real economy.
Rather, the banks had so far used the money to plug their funding needs. There were also signs that the turn in sentiment towards Spain was feeding through to corporate bond markets where spreads were widening."Daylight now between Spain and Italy. We've seen consistently better sellers of Spanish paper for the best part of a week now and the poor auction today will not help," said Societe Generale credit strategist Suki Mann."The storm clouds have been gathering over the sovereign... Sentiment is worsening over Spain's ability to handle the austerity/growth dynamic... Funding is closed."In contrast to the euro zone, short-term U.S. interest rates futures fell on Tuesday after minutes from the Federal Reserve's last policy meeting suggested policymakers are not ready to embark on more bond purchases to keep rates lower in a bid to stimulate the economy. The December 2014 Eurodollar contract fell 11 ticks on Tuesday, pushing implied rates higher although it gave back some of that on Wednesday to stand at 98.655. However, interest rate futures imply traders are not fully pricing in a Fed rate increase until early 2014.
* ECB seen in wait-and-see mode this month, may ease later* Abundant liquidity to drive short-term rates lower* ECB deposits hit record high, seen rising further* Bubill yield negative at auction as banks not trustedBy Marius ZahariaLONDON, Jan 9 Short-term euro zone interest rates are set to fall further in the near term due to a growing excess of cash in the banking system, even though the European Central Bank is unlikely to announce significant easing steps on Thursday. The ECB is seen remaining in wait-and-see mode to gather more data about the impact of its recent salvo of monetary easing measures. Analysts expect it to hold its key interest rate at 1 percent after two consecutive cuts late in 2011 and to hang fire on additional liquidity measures after it injected nearly half a trillion euros in three-year euro loans on Dec. 21. But economists and rate strategists expect the bank to ease monetary policy further in the near future to fight an economic downturn which could slow inflation too much and to help banks cope with almost frozen interbank lending markets.
"They would probably hint that the ... 1 percent level will not be the floor and this might be positive. We like Euribors," said Peter Schaffrick, head of European rates strategy at RBC Capital Markets. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell on Monday to 1.276 percent, the lowest since early April and down from Friday's 1.288 percent. The equivalent Libor London interbank rate, also fell to 1.21729 percent from 1.22857 percent on Friday. Economists polled by Reuters expect the ECB to cut rates to 0.75 percent in February or March.
Forward overnight Eonia rates, which trade just a few basis points above the ECB's 0.25 percent deposit facility rate across the 2012 strip, have less room to fall, analysts say. A cut in the deposit facility rate is unlikely as it would ham the ECB's ability to sterilise its government bond purchases."Even if there is no impact on Eonia from a rate cut, the fact that the refi rate could be lowered will help the banking system because most of the funding is now driven by the ECB rate," BNP Paribas interest rate strategist Patrick Jacq said."Funding for banks is highly driven by the ECB."
ECB TAKES IT ALL Overnight deposits at the ECB climbed a new record high of 464 billion euros on Monday as banks preferred to park their cash with the central bank rather than lend to other banks. That is unlikely to change in the near term, especially as worries over the sovereign debt crisis and what impact it could have on banks are bound to intensify as Italy and Spain begin their tricky 2012 funding quest this week. In fact, deposits at the ECB could rise even further."Starting next week with the first reserve period of the year, reserve requirements will decline by more than 100 billion euros so excess liquidity will increase further and the use of the deposit facility will break the current record," Jacq said. Further highlighting the stress in interbank markets, data showed funding from the European Central Bank to Italian banks rose sharply to nearly 210 billion euros in December from 153.2 billion euros at the end of November. Money market investors outside the banking sector are avoiding banks, preferring to pay a fee to keep their cash in instruments deemed safer than bank deposits. Germany sold 3.9 billion euros of six-month treasury bills on Monday at a yield of minus 0.0122 percent.