* 3-mth Euribor rates fall to lowest since Sept 2010* ECB overnight deposits hit record high at 827.5 bln euros* ECB interest rates seen remaining at 1 pctBy Ana Nicolaci da CostaLONDON, March 6 Bank-to-bank Euribor lending rates fell to their lowest since September 2010, sinking deeper after the European Central Bank poured in a second round of cheap cash last week to buoy the banking system. Analysts expect Euribor rates to keep falling after the ECB injected another 530 billion euros of cheap funding last week, in addition to the 489 billion euros that banks took up in December. Three-month Euribor rates fell to 0.920 percent from 0.934 percent, sinking to their lowest since late September 2010. One trader said the rate of the decline had accelerated after it broke through the 1 percent level in late February."Once it went through 1 percent, which is the refi rate, it seemed to gain a little bit of momentum to the downside and in doing so it has given a little bit more wind and oomph to the price action in the front end of the Euribor strip futures," said a trader.
"The refi rate at 1 percent looks like it is cast in stone," he said. The huge cash boost for euro zone banks was a factor behind economists' decision to reverse their forecasts for interest rate cuts this year in a Reuters poll published last week. The ECB is now expected to keep rates on hold at 1.0 percent until deep into 2013, the poll showed. As long as the ECB maintains its 150 bps corridor, the difference between the deposit and the marginal lending rate, Eonia forwards indicate the refi rate will remain unchanged at 1 pct until year-end, said Don Smith, economist at ICAP. The three-year cash injection from the ECB has pushed excess liquidity in the money market to a record 813 billion euros according to Reuters calculations, smashing the previous record of 535 billion euros set earlier this year.
Having soaked up the three-year funds, banks are now reducing their intake of short-term money. They took just 17.5 billion euros in the ECB's weekly main refinancing operation - the lowest amount since November 2001. HOARDING CASH There are growing concerns that banks continue reluctant to lend to each other despite the excess cash in the financial system and that the extra liquidity will not filter through into the real economy.
Banks deposited a hefty 827.5 billion euros at the ECB's deposit facility overnight up from 820.8 billion euros the day prior. A Reuters poll of traders predicted that the broader euro zone economy would only get limited benefit from the ECB's funding bonanza because banks were hoarding the money rather than lending it on to businesses and consumers. ECB President Mario Draghi recently urged banks 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."It's possibly a sign that banks are hoarding cash for a rainy day," the trader said. "I think the market is now addicted to easy cash and I think we are in a very difficult position weaning banks off this life-support machine."
remained firm on Wednesday a day before settlements of the week's U.S. Treasury bill sales while overseas a measure of counterparty risk eased to its lowest since mid-2007. Overnight repo rates eased a bit from Tuesday's closing levels but repo funding remains "stubbornly high" said Roseanne Briggen, market analyst at IFR, a Thomson Reuters unit."Dealers were expecting general collateral rates to soften into the high teens by today but low rates in the 20s may be the limit; the mid-20s is looking more like the new normal," she said. Higher amounts of T-bill and short coupon sales contributed to the demand for funding, Briggen said."Given the bigger Treasury bill auction settlements on Thursday, any dip in the overnight rate will prove shallow," she said. On Tuesday, the U.S. Treasury sold $40 billion in four-week bills and $25 billion in one-year bills. On Monday, it sold $32 billion in three-month bills and $28 billion in six-month bills. All four of the auctions settle on Thursday. With the Treasury due to announce its monthly auctions of two-, five- and seven-year notes on Thursday, repo rates on those maturities "are starting to heat up," Briggen said.
Federal funds traded between 0.06 percent and 0.375 percent on Tuesday and at a daily effective rate of 0.16 percent, according to the Federal Reserve Bank of New York. The Fed has a target of zero to 0.25 percent for the rate which last traded at 16 basis points on Wednesday. FUNDING STRESS APPEARS TO EASE OVERSEAS Overseas, the three-month spread between euro Libor rates and overnight index swap rates, a measure of counterparty risk, reached its lowest since mid-2007.
Three-month dollar Libor (London Interbank Offered Rates) eased to 0.37575 percent on Wednesday from 0.37875 percent on Tuesday, according to the British Bankers' Association which sets the rate. The Bank of Japan on Wednesday became the latest central bank to ease monetary policy by increasing the size of its program to buy assets. Its move came after the Fed announced more aggressive easing measures last week and after the European Central Bank pledged potentially unlimited, though conditional, bond buying. The difference between the rate of lending over three months and overnight in euros was last at 6 basis points, down from 7 basis points the previous day and around its lowest since mid 2007, right before the U.S. subprime crisis began in earnest. The three-month dollar Libor/OIS and the sterling equivalent have more than halved since January to 22 bps and 24 bps respectively."The Libor/OIS spreads in the G3 currencies dollar, euro and sterling have declined massively, especially since the end of last year ... mainly because there are various central bank measures that were introduced during (that) time," Max Leung, rates strategist at Bank of America Merrill Lynch, said.
Eonia forwards suggest markets still see some chance of the ECB cutting the deposit rate to negative territory even though expectations were pared back after ECB President Mario Draghi did not given any guidance on this at the last monetary policy meeting. Absent another deposit rate cut, Eonia rates would probably remain near current levels of 10 basis points, analysts say. If three-month Euribor rates continue to fall - as they have done recently on expectations of further cuts in the refinancing rate - Libor/OIS spreads could tighten closer to zero. But Leung said the market would struggle to take it much lower."Whether you lend overnight or you lend over a fixed term, you are not gaining anything from the risk, so banks may be even less willing to lend to each other in that case on a term basis," Leung said. Eurodollars were higher across the curve, largely helped by the Bank of Japan's stimulus announcement, extending quantitative easing by 10 trillion yen ($127 billion), double the usual amount, to 80 trillion yen, with the increase meant for purchases of government bonds and treasury discount bills. The Bank of Japan eased monetary policy on Wednesday by boosting its asset-buying program as prospects of a near-term recovery in the world's third-largest economy faded due to weakening exports and a prolonged slowdown in Chinese growth. The decision came soon after major quantitative easing announced by the Fed last week and amid worries that a territorial dispute with China, Japan's biggest trading partner, would further damage exports. Dovish minutes from the Bank of England also aided the bid for eurodollars, Briggen said. More Bank of England asset purchases to boost Britain's weak economy are likely, a number of central bank officials said in policy minutes published on Wednesday.
* Despite mixed signals, market expects more cheap ECB loans* Falling inflation, strong euro could force ECB to act* Dwindling liquidity seen pushing near-term rates upBy Emelia Sithole-MatariseLONDON, Oct 24 Euro zone money market investors are betting the European Central Bank will offer banks new long-term loans in 2014 to curb a surging euro and a potential rise in short-term rates that could derail a nascent economic recovery. Business survey data released on Thursday showing activity in the region's services sector unexpectedly slowed in October highlighted the fragility of the recovery in the euro bloc, fostering expectations the ECB will loosen policy further. ECB President Mario Draghi has signalled the bank will ease if needed but recent comments by some of his colleagues have cast doubt on whether this will involve fresh stimulus like the 1 trillion euros in low-cost three-year loans (LTROs) it offered banks in 2010 and 2011. Money markets are pricing in the possibility of a further rate cut or another LTRO with participants leaning more towards the latter as it has proven more effective in bringing down lending rates more broadly than a rate cut. A rate cut would also would not help interbank lending and so still leave weaker banks out in the cold and reliant on ECB largesse. Overnight bank lending rates, as measured by one-month Eonia forward contracts, remain well below the ECB's 0.5 percent refinancing rate until late 2015. The rates would move above the ECB's main rate if the market starts pricing in tighter monetary and liquidity conditions.
A further easing in ECB policy would drive money market rates lower, making the euro less attractive for investors. The single currency is at its strongest against the dollar in two years and threatening to choke export growth."The market is gradually positioning for the potential for the ECB to take another policy measure via a new LTRO during the course of next year," said Patrick Jacq, a strategist at BNP Paribas."This has probably been reinforced by the evolution of the euro/dollar which has strengthened very significantly and could cause some concern as far as the economic recovery is concerned."Draghi said earlier this month the ECB was "attentive" to developments in the euro exchange rate even though it is not among the bank's formal targets.
The euro rose above $1.3800 for the first time since November 2011 on Thursday as the dollar remained under pressure due to expectations the Federal Reserve will delay tapering stimulus until next year. It has risen 4.7 percent against the dollar and 5.3 percent versus sterling so far this year. Companies in the region are already feeling the pinch as the euro's trade-weighted index - reflecting its strength against a raft of other currencies - hit its highest in nearly two years. Anglo-Dutch company Unilever Plc reported slower sales growth after demand for its consumer goods was hit by the devaluation of a handful of emerging market currencies. German business software company Software AG warned with its results on Thursday that its profits could be hit if the euro stayed strong while Italian cable maker Prysmian said the strong euro was not helping.
APPROPRIATE TOOL A sharp fall in inflation could also give the ECB reason to act next year, analysts said. At 1.1 percent in September, inflation has fallen way below the ECB's close-to-2-percent target."Although the ECB doesn't target the exchange rate, this low level of inflation and further strengthening (of the currency) could be an argument for a rate cut," said Anatoli Annenkov, a senior European economist and ECB watcher at Societe Generale."But we still think that an LTRO is the more appropriate tool because on the one hand it could support a weaker currency and lower inflation while providing a liquidity backstop for next year."Money market rates may come under further upward pressure, and the ECB under pressure to act, as excess cash in the euro system is squeezed as banks repay earlier ECB loans. Rates usually start to rise once excess liquidity - the amount of money in the banking system above what it needs to function - drops beneath 200 billion euros. It stands at 187 billion euros, its lowest since late 2011, just before the ECB flooded markets with 1 trillion euros via LTROs."It's just a matter of time in the next few months ... we'll start to have more upside pressure on Eonia. That's something that the ECB doesn't want to see and could be a driver to push the ECB to deliver another round of LTROs," said ING strategist Alessandro Giansanti.
* 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.
* Tentative signs of bank worries grow* Spain the main concern* Thoughts of further ECB action prematureBy Kirsten DonovanLONDON, April 20 As the effects of the European Central Bank's huge three-year liquidity injection wear off and the euro zone debt crisis escalates, funding pressure on banks is intensifying again, although the excess cash should curtail sharp market moves. Spain has taken centre stage in the region's long-running crisis on concerns over its ability to meet fiscal targets. The health of its banks, which are now stuffed with Spanish government bonds bought with the ECB cash, are also a worry as yields on those bonds have begun to rise, with 10-years testing the 6 percent level."Yields have moved against them and we believe that Spanish banks are already losing money rather than getting the positive benefits from the carry trade they hoped for," said RBS rate strategist Simon Peck."Though this might not be an immediate concern in terms of 2012 bank bond redemptions, which are likely to be covered by the holding of cash balances with the ECB, we expect markets to focus more on this in the next few weeks."
Data earlier this week showed Spain's banks are also carrying their biggest burden of bad loans since 1994, adding to doubts about whether ailing lenders can survive without outside help. BNP Paribas rate strategist Patrick Jacq said that was one factor fuelling renewed concerns about European banks."Despite the short-term liquidity bonanza, pressure on bank funding returned recently. After easing for a long period, stress on liquidity is rebounding slightly."Moody's threat of a mass downgrade of European financial institutions is also doing little to help sentiment .
One measure of stress, the iTraxx index of credit default swap prices on bank's senior debt has risen around 75 basis points over the last month to hit its highest levels since mid-January. And measures of counterparty risk in the interbank market are showing signs of strain with the spread between three-month Euribor rates and overnight indexed swap rates rising to around 40 basis points earlier this week."The abundant short-term liquidity cannot prevent spreads from rising at the moment," Jacq said."(They) are currently driven by the near-term credit assessment on banks, (which) will remain the driver of OIS/BOR moves over the coming days and weeks."
There are signs that a minority may be beginning to anticipate further action from the ECB, either in terms of liquidity provision or an easing of policy rates, something analysts, however, think unlikely. The forward Eonia overnight rate based on ECB policy meeting dates in six-months time has fallen to around 32 basis points from 36 basis points at the end of March, according to Commerzbank."There is some small speculation the ECB will do something more," said the bank's strategist Benjamin Schroeder."It hasn't run very far but even this tentative speculation is quite far-fetched at the moment. I don't think the ECB will change its stance very quickly."Not only has the ECB proven reluctant to be the euro zone's lender of last resort, the impact of its liquidity operations has been diminishing with short-dated peripheral yields beginning their march higher just a couple of days after the second three-year financing operation (LTRO). The pace of the decline in interbank lending rates has also slowed."In many respects the LTRO's have been a confidence exercise, reducing tail risks for the banking system," said RBS' Peck."We've seen the decreased marginal impact of the second operation versus the first... What you'd need to see now for things to improve again would be an indefinite commitment to longer-term liquidity provision, which looks very unlikely".
* Stress gauges unlikely to reach last year's panic levels* ECB liquidity, dollar loans to keep lid on money market strainsBy Emelia Sithole-MatariseLONDON, May 16 Uncertainty about Greece's future in the euro nudged some indicators of money market stress higher on Wednesday, though still far short of last year's levels in a banking system saturated with central bank cash. Worries have intensified over Greece as it heads towards a new election next month that could hand power to leftists opposed to terms of an international bailout. Another growing concern is the possible cost of fixing Spain's banking system.
Three month euro/dollar cross currency basis swaps , which show the rate charged when swapping euro interest rate payments on an underlying asset into dollars, have widened to minus 54 basis points from around minus 46 bps in early May - its best level in nine months. The measure, which shows funding stress when investors compete for dollars, is expected to move wider in coming days but analysts say it is unlikely to get close to November's minus 167.5 when investors feared another credit crunch.
"Money markets are protected by the ECB's LTROs and the dollar swap lines," said Giuseppe Maraffino, a strategist with Barclays Capital. The European Central Bank's Long Term Refinancing Operations have given banks about 1 trillion euros in long term loans. Swap lines were set up between the U.S. Federal Reserve, the ECB and other major central banks to avert a repeat of the finiancial crisis that followed Lehman Brothers' collapse in 2008.
One trader said the swap lines meant the cost of buying dollars would be kept under control in capital markets after the central banks cut the cost of the loans. The difference between forward rate agreements (FRA) and Eonia rates - a gauge of credit risk - has also widened across the curve this week, prompting a sell-off in Euribor futures. The deterioration in the euro zone debt crisis has also fostered expectations in the markets that the ECB will cut interest rates by 25 basis points to 0.75 percent by the end of this year to protect the economy.