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Money markets low interbank rates could survive ecb cash letdown


Feb 14 Some government bond investors may be disappointed if the amount of cash banks borrow from the ECB this month does not live up to rising expectations but money market rates are likely to weather any below forecast take up. A Reuters poll showed the European Central Bank was expected to pump half a trillion euros of cheap three-year loans into the euro banking system on Feb. 29, up from 400 billion euros in a poll last week and 263 billion euros in a mid-January survey. At the first three-year auction in late December, banks grabbed 489 billion euros. A stressful end of the year for euro zone banks made many analysts reluctant to bet they will use the 1 percent rate loans to buy higher yielding sovereign debt. But a sharp drop in short-term Italian and Spanish debt yields since the start of the year is now increasing expectations for the second take-up. This is further fuelling the peripheral debt rally, raising questions as to whether expectations are spiralling out of control."If demand is far smaller than expected this could disrupt the recent trend of tighter spreads and steeper curves (in peripheral bond markets)," BNP Paribas rate strategist Patrick Jacq said who expects demand to be 350-450 billion euros. In money markets the impact would be more limited given that interbank lending rates have already been set on a clear falling trend by the unprecedented excess liquidity seen after the first tender, he added.

Spreads between overnight index swaps and benchmark interbank rates, widely used as a gauge of money market tensions, could re-widen temporarily, but that will only be a knee-jerk reaction, he said. Some analysts argue that low demand could also be interpreted as a sign that banks are confident they can refinance their debt, while a very large take-up could raise concerns about the dire state of the euro zone financial system."A 200 billion result will be more positive than a 1 trillion result. The market would view that as banks not requiring significant liquidity needs," said Padhraic Garvey, head of investment grade rate strategy at ING.

REPOSITIONING

Shifts in demand at the ECB's one-week and one-month tenders on Tuesday also supported expectations of a large take-up. Banks reduced their intake of one-month funds to 14 billion euros from 39 billion euros in a previous one, but increased their demand for one-week loans to 143 billion euros from 109 billion."There could be an element of repositioning from a longer to a shorter dated refinancing operation in order to take part in the three-year (tender) in a couple of weeks time," Credit Agricole interest rate strategist Orlando Green said. Euribor futures stabilised after last week's sell-off following a post ECB meeting paring back of expectations for more ECB interest rate cuts. Barclays Capital strategists, who expect a demand of some 350 million euros at the three-year tender, see any further drop in the futures prices as a buying opportunity on the view that the improved mood will continue to drive Euribor rates lower. They see Euribor rates fixing within the 90 basis points area in one month's time and falling to the 75/80 bps area by the European summer. On Tuesday, three-month Euribor rates hit their lowest since Jan. 2011 at 1.051 percent. Equivalent euro London-fixed Libor rates fixed at 0.98286 percent versus 0.98614 percent on Monday.

Money markets positioning for more ecb easing, but not in may


* ECB seen on hold in May, but may ease later* Money market rates falling again across 2012 strip* Curve seen flattening as rates seen low for longerBy Marius ZahariaLONDON, May 2 Short-term euro zone interest rates predict the European Central Bank will keep policy on hold on Thursday, but pricing also implies it could ease monetary policy further in coming months as the region struggles with a painful recession. The recent re-positioning in money markets for further easing comes after a protracted period of little movement. Investors thought at the time that the ECB's injections of about one trillion euros ($1.3 trillion) of cheap loans into the banking system (LTROs) would have a significant impact on the economy and could be the central bank's last moves this year. But weak business surveys and a recent escalation of the sovereign debt crisis have signalled that the impact of the LTROs has faded and more easing may now be necessary.

"Everything is pointing towards the intensification of the contraction again," Rabobank senior market economist Elwin de Groot said. "The market is preparing for the possibility that the ECB might cut rates further down the line.""I don't think it will happen this week. The ECB would be wary of being too responsive to a small set of data."Overnight Eonia rate forwards dated on 2012 ECB meetings have fallen in the past week by around 2-6 basis points to 24-30 bps, while Euribor futures have risen, implying expectations for a further fall in Euribor rates. Longer-dated rates fell more, reflecting expectations any move might occur in the second half of the year.

Max Leung, a rates strategist at BofA Merrill Lynch Global Research, said markets were pricing in a 10-20 percent probability of a 25 bps key rate cut by midsummer and as much as a 40 percent chance of a cut by the end of the year. But he expected markets to soon price in a higher chance."The ECB said its next moves would be data-dependent. If we look at the Purchasing Managers Indexes for the euro zone, they are at levels at which the ECB cut rates back in October last year," Leung said.

"If the ECB cuts (its key refinancing rate from a record low of 1 percent), there is a decent chance that it will cut the deposit rate as well, which means there could be 10-15 basis points more to go in Eonia rates and Euribors."In his post-meeting speech on Thursday, Draghi is widely expected to remain cautious and suggest that the ECB is still in a wait and see stance. Any dovish signal he sends out would accelerate the markets' positioning for more easing. Barclays Capital rate strategist Giuseppe Maraffino said weak data and increased uncertainty about Spain could mean that markets would continue to price in a hefty chance of more easing even if Draghi gave no clues that this was likely. The markets' behaviour goes against the house view that rates will remain at 1 percent until the end of 2015, but Maraffino said it was "premature" at this point to bet against the trend and pay Eonia rates. Markets are not only pricing in a higher probability of a cut, but they are "increasingly embracing" the view that rates will stay low for longer, Societe Generale rate strategists said in a note. Having recommended a bet on a narrowing of the spread between one- and two-year rates a month ago to reflect that view, they are now recommending the same bet moved one year into the future using forward rate products.

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 short term euro rates fall after weak gdp data


* Euribor futures rally after GDP data, Eonia rates fall* Markets expect liquidity to stay abundant for longer* Deposit rate cut still seen as "exotic" scenarioBy Marius ZahariaLONDON, Feb 14 Euro zone money market rates dropped on Thursday and were seen falling more in the near term after data showing the euro zone economy had slipped deeper into recession than expected. The euro area's gross domestic product contracted by 0.6 percent in the last quarter of 2012, compared with a forecast of 0.4 percent. German, French and Italian data all came out below expectations.

A weak economic environment raised the prospect that banks could remain dependent on European Central Bank liquidity for longer than previously thought, keeping excess cash in the system abundant."The GDP data suggest the ECB is not going to be in any position to proceed with a liquidity exit strategy ... euro zone (banks) themselves are not confident in the situation," G+ Economics managing director Lena Komileva said. Euribor futures <0#FEI:> rose across the curve, implying expectations that three-month Euribor rates, their underlying asset, would in the future settle at levels lower than previously expected.

The December 2013 Euribor was 3.5 ticks higher at 99.59, implying the underlying rate - a gauge of market expectations on liquidity, the ECB's interest rate path and counterparty risk - was now seen settling at 0.41 percent at the end of the year. That was still well above Thursday's settlement of 0.226 percent, implying markets expect the pace of the rise in short-term euro rates to slow down, but do not see the trend reversing. Recent larger-than-expected repayments by banks of three-year ECB loans taken in late 2011 led to a rise in money market rates this year.

ECB President Mario Draghi at least paused the trend last week when he said he would monitor money markets to ensure policy remains "accommodative". He estimated that even after the initial repayments of the second of the ECB's loans, excess liquidity would not drop below 200 billion euros - the level at which overnight borrowing costs typically begin to rise. One of the ECB's weapons against a fast rise in money market rates is a cut in the deposit facility rate to negative levels from zero. The bank's vice-president Vitor Constancio said on Thursday such a move was "a possibility" but no decision had been taken. Money markets have priced out that possibility earlier this year, but if data stays weak or the euro currency strengthens to levels that could cripple the economy, the forward euro overnight Eonia rate curve may price it back in."The data puts us back in the camp that the ECB needs to stay accommodative. A deposit rate cut is still somewhat exotic but it shouldn't be ruled out," RBS strategist Harvinder Sian said. He added that 1y1y Eonia forwards - an instrument that shows where markets expect one-year Eonia rates to trade starting in one year's time - could fall to 20 basis points from current levels of 38 bps, which were 5 bps lower than Wednesday's close.

Money markets short term us debt still in demand


* Big indirect bid for six-month Treasuries* Overnight collateral rates holding in upper teens* German, Dutch, French bill stay near zero* ECB bond-buying bets spur demand for peripheral T-billsBy Ellen FreilichNEW YORK, Aug 6 Appetite for short-term paper remained strong in the U.S. and Europe on Monday as the U.S. Treasury sold three- and six-month bills and short-term debt of both peripheral and safe-haven European nations proved popular. The U.S. Treasury sold $32 billion in three-month bills at a high rate of 0.10 percent, awarding 45.09 percent of the bids at the high. The value of bids received eclipsed those accepted by a 4.56 ratio.

A strong indirect bid, said to be fed by purchases by central banks or other monetary authorities, emerged for the Treasury's $28 billion of six-month bills. The six-month bills sold at a high rate of 0.135 percent, with 83.9 percent of bids awarded at the high. The ratio of bids received over those accepted was 5.00. In Europe, demand for Italian and Spanish Treasury bills has revived since European Central Bank President Mario Draghi said on July 26 he would do whatever was necessary to preserve the euro, Italian one-year bill yields have halved to 2.27 percent, while their Spanish equivalents have dropped some 200 basis points to 3.07 percent. But while those assets tempted some investors, safe-haven German and French short-term debt markets still drew a crowd.

France and the Netherlands both sold bills on Monday at negative yields, meaning investors were willing to pay for the privilege of parking their cash in higher-ranked debt."Safe-haven European debt markets are relatively small compared to the Treasury market so you end up with eye-popping yield levels when a flight-to-quality happens," said Thomas Simons, vice president and money market economist at Jefferies & Co in New York. Meanwhile, overnight collateral rates were expected to hold near their current levels in the upper teens, said Barclays Capital analyst Joseph Abate.

"Treasury bill settlements on Thursday are small, and the monthly mortgage-backed securities principal and interest payments will not start until next week," he said. "As a result, we expect overnight Treasury collateral to hold around 17 basis points this week."Even when the Treasury's $72 billion refunding settles next week, it might not push up repo rates much because relatively little new cash is being raised, analysts said. Treasuries totaling $54.2 billion are maturing, leaving a net new issuance figure of just $17.8 billion. Meanwhile, bank-to-bank lending rates inched lower after the European Central Bank fueled expectations for another interest rate cut next month. Comments by ECB President Mario Draghi heightened expectations the bank could cut its key rate below its record low of 0.75 percent. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased to 0.374 percent from 0.375 percent.

Money markets supply pushes short term us rates higher


* Bill rates, repo collateral rates, show easing in markets * Interbank lending rates steady ahead of ECB 3m tender * Strong demand for ECB liquidity could spark more worries By Emily Flitter and William James NEW YORK/LONDON, Feb 24 U.S. money markets closed out the week with an easing of conditions both in the repo and short-term Treasury markets, where demand for securities showed new slack. The extreme conditions that were present earlier in the week in the repo market, where five- and seven-year Treasury notes were trading as repo collateral at dramatically negative rates on Tuesday and Wednesday, eased further on Friday. In the Treasury bill market, rates rose as demand ebbed for the extreme safe-haven, very low-yielding securities. In both cases, new supply seemed to be the source of the market move. The Treasury Department sold $35 billion in new five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. Both auctions drew strong demand and a lower-than-expected yield, forcing Treasury traders to buy more securities outright and borrow fewer of them in the repo market. The Treasury Department announced a $20 billion sale of 49-day cash management bills on Thursday. The coming sale will add more supply to the short-term bill market. In addition, the Federal Reserve sold short-term Treasuries twice this week, also adding to the supply. Tom Simons, money-market economist at Jefferies & Co In New York, said the Treasury's CM announcement seemed to have a noticeable effect on the short-term market. "The whole bill market is a little bit heavier because of this increased supply," he said. "I think it's possible we could get another mid-April maturity CM sometime soon so that would put further pressure on the market." AWAITING ECB TENDER Meanwhile, interbank markets will remain in the thrall of broader investor risk appetite next week as the European Central Bank reveals demand for its three-year loans, with a high take-up likely to buoy sentiment and push lending rates lower. Financial markets will be holding their breath on Wednesday when the ECB unveils how much three-year cash banks have borrowed in the second, and possibly last, ultra-long lending operation. In a bid to alleviate bank funding pressures the ECB has loosened collateral rules and temporarily opened up unlimited access to long-term loans, a move that has also soothed spiking tensions in the sovereign bond market. In the past, interest in central bank liquidity operations has been limited to money market experts seeking to gauge the impact on short-term interest rates. The traditional dynamic was the greater the excess cash, the lower rates would fall. But in a system already swimming in more money than it needs, bank-to-bank lending rates are now more likely to rise or fall depending on whether the refinancing operation boosts support for the euro zone's ailing sovereign bond market. The latest Reuters poll points to a demand of 492 billion euros at the long-term refinancing operation (LTRO). WHEN THE DUST SETTLES Looking beyond the assumption that above-consensus demand would push rates lower at first, analysts saw some risk that the move would not be sustained. "If there's a big number it could be an initial positive reaction by the market, but then they will turn to looking at the crisis from a more fundamental perspective and whether this is enough to turn it around," said Elwin de Groot, senior market economist at Rabobank in Utrecht, the Netherlands. "In our view, we need more measures by European leaders to do that, so it could well lead to more negative market sentiment in the days following - even if there's a big take-up." Demand well in excess of the consensus may also raise broader economic concerns: in the first instance that banks were in worse health than the bullish market had assumed, before more structural worries come to the fore. "That (knee-jerk) may move into a concern that banks might not be focusing on core business quite as much," said Peter Chatwell, rate strategist at Credit Agricole in London. "Ultimately, to improve the macroeconomic environment we need banks not just to be full of funding, but looking to take real economy business opportunities."