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Money markets euro zone lending rates are far below us


Aug 16 Euro zone interbank lending rates have fallen far below their U.S. equivalent on expectations that the European Central Bank will ease monetary policy further, drawing closer to the Federal Reserve's near-zero rate policy. Three-month Euribor rates have hit record lows on a regular basis since the last monetary policy meeting when ECB chief Mario Draghi said the bank's policymakers discussed the possibility of cutting rates at their August meeting but had decided it was not the time. Given U.S. rates are already near zero, further monetary easing in the world's largest economy should come in the form of non-standard measures - probably more "quantitative easing" through central bank bond-buying - explaining the growing difference between euro and dollar interbank rates, analysts said."The divergence between the two ... is mainly due to different monetary policy expectation between the euro zone and the U.S., with markets still pricing the possibility of further policy rate cuts in the euro zone," Giuseppe Maraffino, fixed income strategist at Barclays said."The market is now pricing a high probability of a refi rate cut in the euro zone and also some chance of a deposit facility (rate) in negative territory."Three month euro Libor rates were little changed on Thursday at 21 basis points, half their dollar equivalent at 43 basis points.

The three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased to 0.339 percent from 0.341 percent on Wednesday. The ECB is expected to cut its refinancing rate by another 25 basis points to 0.5 percent in September, according to a Reuters poll of economists. Eonia forwards suggested the market expected overnight rates to fall further from current levels, to a trough of 0.068-0.018 percent in November from 0.11 percent currently.

Given that the deposit rate - currently at zero - serves as a floor for overnight Eonia rates, analysts said this suggested the market was pricing in some possibility of negative deposit rates. ECONOMIC STRESS

While the euro zone economy contracted 0.2 percent in the second quarter and was seen slipping back into recession, recent U.S. data has suggested economic growth might pick up in the second half of the year. Still, the data still pointed to lacklustre growth in the U.S. economy, fueling the view that more Federal Reserve stimulus may be in the offing, although perhaps not as soon as next month. The expectations for ECB action - be it through lower interest rates or some other non-standard measure - was high after strong comments from its president Mario Draghi that the bank would do what was necessary to preserve the euro. Although pledges for bond-purchases would be subject to countries asking euro zone rescue funds for aid first - and therefore highly political - the ECB could also resort to measures such as providing more cheap funding or easing collateral rules further, analysts said. Poll respondents were split on the likelihood of further long-term refinancing operations like those ECB conducted in December and February, essentially hosing the markets down with over one trillion euros of three-year cash."There is a very strong chance of easing, which instrument they use is still open to question," Ciaran O'Hagan, strategist at Societe Generale.

Money markets key interbank lending rates ease


* 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."

Money markets longer term euro zone interbank lending picks up


* Eonia volumes drop year-on-year in January* Partly caused by dropouts from rate-setting panel* Banks also allocating more funds for longer-term lendingBy Marius ZahariaLONDON, Feb 4 Euro zone overnight bank-to-bank loan volumes shrank sharply year-on-year in January, partly reflecting signs of healing in the financial system as banks become more confident about lending longer-term. Improved longer-term access to funds in money markets is a crucial pre-condition for banks to lend more money to businesses and help the region's economy recover. Reuters data on settlements of the euro overnight Eonia rate showed the daily average volume of trades dropped to 17.37 billion euros in January 2013 from 30.47 billion in the same month of last year. Withdrawals from the rate-setting panel, including heavyweights Citi and Rabobank, in the wake of a scandal over setting interbank interest rates, contributed significantly to the drop in volumes, but are unlikely to have accounted for the entire sum, traders said.

Better economic data in the euro zone and the United States and expectations the European Central Bank would step into government bond markets if the three-year-old debt crisis escalated are encouraging banks to take more risk. That is shifting some of the money from low-risk overnight trades to longer-term maturities."The situation is improving from a curve extension point of view and the quality of names being lent to is also decreasing," one money market trader said."I've (even) seen one-year trades going through, but (most of the activity) is in the three-month and six-month sectors and volumes are picking up."

MARKET FUNDING Another sign of improved confidence in money markets could be that banks repaid a higher than expected amount in three-year loans (LTROs) taken from the ECB late in 2011, when the central bank offered unlimited cash to prevent a credit crunch. Paying back long-term loans to the ECB means banks become more reliant on the market for funds, and this may have also contributed to the extension of maturities in interbank loans.

"We have two effects. One, of course: the panel from which the rates are calculated is shrinking and some of the banks which you would expect to add more volumes to the calculation of the index have left the panel," Commerzbank rate strategist Benjamin Schroeder said."And two: at the moment we have the ... repayments of the LTROs so you have lower overnight volumes because banks extend the duration of their interbank trades to bridge the ... LTRO repayment dates."Eonia rates are calculated on a trade-weighted basis using data from the same 39 contributors that make up the panel setting Euribor, an important gauge of how much banks pay to borrow from their peers. Euribor and its London-based counterpart Libor are going through a credibility crisis as some banks have been accused of manipulating Libor rates. Several lenders have pulled out of the Euribor panel in recent months. The overnight rate last settled at 0.081 percent, comfortably within an extremely narrow range seen in the past six months. Longer-term rates rose sharply in January -- one-year Eonia rates have risen five-fold to 0.2 percent -- due to expectations ECB loan repayments could massively reduce the excess liquidity in the euro zone. The pick-up in volumes and in rates at the longer end of the money market curve can only be sustained if economic data continues to improve, traders said, and many in the market have expressed doubts that would be the case."It's only so far we can move away from fundamentals," ICAP strategist Philip Tyson said.

Money markets on the trail of the ecbs cheap cash


* Excess cash to keep money market rates low for long time* Peripheral bonds may be pressured by bank debt repayments* Expectations for bumper three-year funding spiralBy Kirsten DonovanLONDON, Feb 3 Even if growing expectations for a bumper take-up at the European Central Bank's next offering of long-term funds are disappointed, money market rates should stay at rock bottom as the fresh cash pours into banks' coffers. However, much of the funds could be used to repay upcoming bond redemptions and debt issued by struggling euro zone governments could eventually come under pressure. The half a trillion euros of 3-year loans handed out to banks in December has helped eased credit concerns, brought down the cost of borrowing for embattled countries such as Spain and Italy and led to a collapse in short-term rates in the secured repo and treasury bill markets. Although a vast chunk of the 500 billion euros of excess cash in the banking system is being parked back at the ECB overnight, there are clues elsewhere as to what is being done with the rest of the money. It would appear that while Northern European banks are channelling the money into safer places such as German government bonds, repos and the ECB's vaults, Southern European banks, especially in Spain, have dived back into their own countries' sovereign issuance. The euro area balance sheet compiled by the ECB shows Spanish banks' holdings of government bonds increased by around 25 billion euros in December from November. Although some of this will be accounted for by the rise in prices as peripheral debt markets rallied, Spanish banks were far and away the biggest purchasers of such bonds in the final month of the year.

Italian banks' holdings increased by around 4 billion euros but German, French and Dutch banks were net sellers. Spanish and Italian banks also increased their holdings of bank bonds by 17 billion euros. JP Morgan analyst Nikolaos Panigirtzoglou estimates that around 100 billion euros of current three-year funding will be used to invest in bonds paying higher rates of interest - the so-called carry trade. So the rise in government and bank bond holdings in December - allowing for the change in value due to the market rally - accounted for less than half of that cash. And with the rally in both government and bank bonds persisting throughout January it is likely this investment trend continued in the first weeks of 2012."The (three-year operation) was near the end of December, leaving only one week so our guess is most of the cash was deployed in January," Panigirtzoglou said.

Commerzbank strategist Christoph Rieger said he believed Northern European banks were parking cash in high quality repos and in the ECB's overnight deposit facility, fuelling the demand for safe-haven paper such as Bunds even as risk appetite in financial markets picked up. Banks currently have one more opportunity to obtain cheap three-year funding but have to repay around 550 billion euros of maturing bonds during this year, Commerzbank estimates. The Financial Times reported earlier this week that European banks were preparing to double their crisis loans to a trillion euros at the next three-year operation at the end of February although a Reuters poll on Tuesday saw an expected take-up of a more modest 325 billion euros.

"Markets are delirious with a 1 trillion euro headline popping up again," Rieger said, urging caution. And a euro zone central bank official was also sceptical about the figure."I think now the analysts are getting carried away, personally I think it is likely to be a similar level as the last one."The money being used by banks addicted to ECB funding as well as the solid peripheral banks to buy government bonds may well be used to meet bond redemptions as the year goes on."The balance sheet expansion that is taking place when banks are making use of the three-year operations supports a range of assets," Rieger said."However, unless this expansionary impulse leads to a lasting thawing of capital market funding and a recovery in risk appetite, the expansion of bank balance sheets will likely be temporary."Panigirtzoglou does see the trend of parking money in repo markets and short term T-bills as likely to continue however. Evidence that money is finding its way there is reflected by, for example, a fall in short-term Italian repo rates to 30 or 40 basis points since December's three-year operation from around 1.5 percent before, while T-bill yields have collapsed."The short-term vehicles, repo, T-bills, even unsecured overnight rates, are all being supported by this wall of cash which is going to stay for a very long time. Period," he said."There is so much cash that rates will stay low even if we assume some of the money is used to repay debt because any rise in for example repo rates will make it attractive to move cash out of the deposit facility."

Money markets still pricing in chance of ecb deposit rate cut


Nov 27 Money markets are still pricing in some chance that the European Central Bank will cut deposit rates into negative territory, even though that possibility did not feature at its last rate-setting meeting. But ECB President Mario Draghi also said on Nov. 8 the euro zone economy shows little sign of recovering before the end of the year, leaving open the possibility of an interest rate cut in the months ahead. Excess liquidity in the financial system and the ECB's non-standard measures have made it hard to use money market instruments as a gauge of interest rate bets, analysts say. But the fact that overnight Eonia rates are currently at 7 basis points - offering a spread over the deposit rate at zero - and the fact that Eonia forwards suggest they could fall to around 3 basis points in March next year shows that possibility still exists, analysts say.

"There is some probability priced in the forward on the Eonia that the deposit facility could be cut. This explains why Eonia is seen below the current level," said Giuseppe Maraffino, a fixed-income strategist at Barclays. Key Euribor bank-to-bank lending rates steadied, finding a firmer floor as a year-long downtrend under the weight of excess liquidity in money markets fades.

Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, were unchanged at 0.189 percent. Barclays expects the three-month Euribor rate to stabilize around this level. But it says the risks are skewed to the downside, "as rising expectations of a possible drop of the deposit rate into negative territory should push EONIA rates down, thus creating room for a further decline in the Euribor."

Banks demand a bigger premium to lend to each other over three months than overnight to compensate for the greater risk attached to lending for a longer time. Benjamin Schroeder, a strategist at Commerzbank, says the bank does not see a deposit rate cut on the horizon but also would not bet against a further fall in the Eonia rates."We wouldn't now start engaging in receiver positions here - betting on higher Eonia rates in the near term," he said.

Money markets traders pare us rate hike bets after weak data


(Adds analyst quote, updates market action)By Richard LeongNEW YORK Nov 13 U.S. interest rates futures hit session highs on Friday as traders pared bets on the Federal Reserve tightening monetary policy following weaker-than-expected October data on domestic retail sales and producer prices. Cost for banks to borrow dollars remained elevated with the three-month London interbank offered rate rising its highest level since September 2012. Rates futures implied traders see a 66 percent chance the central bank will raise interest rates from near zero for the first time in nine years at its December 15-16 policy meeting. This was lower than 70 percent at Thursday's close, according to CME Group's FedWatch program. On Friday, the U.S.government said retail sales edged up 0.1 percent last month, falling short of a 0.3 percent increase forecast among analysts polled by Reuters, while producer prices fell 0.4 percent last month, compared with an expected 0.2 percent increase.

While rates futures firmed a tad, borrowing costs for dollars ended higher on the week as banks sought to restrain their wholesale lending as year-end approaches, analysts said. In the $5 trillion repurchase agreement market, interest rates finished at 0.23 percent, up from 0.18 percent on Thursday and 0.15 percent from a year ago, according to ICAP.

In the currency market, the interest rate spread on a three-month swap contract to exchange euro-denominated payments for dollar-pegged payments hovered at its widest level since July 2012. Banks and hedge funds use these products for currency bets, while U.S. companies use them to hedge their non-dollar denominated bonds. The cost premium, measured by the three-month London interbank offered rate on dollars over the three-month rate on euros, was unchanged on the day at minus 45 basis points on Friday, according to ICAP.

Three-month dollar Libor climbed to 0.36360 percent, while its euro counterpart held at a record low of minus 0.09214 percent. Money market reform has likely resulted in higher costs for foreign banks to borrow dollars, as some money funds have pared or shed their holdings of commercial paper, certificates of deposits and other non-Treasury securities, analysts said. This may have led some European banks to rely on cross currency swaps to access dollars, said Andrew Hollenhorst, a Citi interest rates strategist."Foreign banks that source USD