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Money markets ecb cash injection to keep rates pinned


* Banks grab another half trillion euros of ECB funds* Money market rates may struggle to go much lower* Focus to return to interest rate cuts?By Kirsten Donovan and William JamesLONDON, Feb 29 A sharp increase in excess cash in the banking system following a second three-year ECB funding operation on Wednesday is set to keep money market rates pinned down but may do little to free up lending to the real economy. Banks took 530 billion euros in three-year funding on Wednesday, adding more than 300 billion euros of new liquidity into the system and pushing the ECB's balance sheet to more than 3 trillion euros. Excess liquidity is set to rise to more than 800 billion euros, which will keep money market rates very low. But they are unlikely to fall much further - the Eonia overnight rate is already trading at just 0.36 percent, only around 10 basis points above the ECB's deposit rate, which is seen as a floor."The increase in the liquidity surplus, from an already all-time high level, is unlikely to have much more of an impact," Barclays Capital analysts said."(It) will at very least keep a lid on repo rates and all short-end rates, and will actually likely continue to push some of them lower, for example Libor, as sentiment should continue to be positive and investors will continue to try and grab yields."

Benchmark three-month euro Libor rates fixed a basis point lower at 0.896 percent. Commerzbank strategist Benjamin Schroeder said that with rhetoric from ECB officials pointing to Wednesday's three-year operation being the last, the focus should return to the possibility of interest rate cuts. Eonia forwards are not pricing in a cut in March, but a few basis points of cuts are priced in over the next few months."The ECB is never going to pre-commit, they'll likely wait for the effects of these tenders to unfold," Schroeder said."That's what we are seeing in these Eonia forwards: rate cut speculation setting in only two months out."

What is less clear is whether the excessive cash will reach the wider economy with banks showing scant signs last month of lending on funds borrowed at the ECB's first three-year operation in December."The (financing operations) do not address the underlying solvency issues and ultimately funding stresses can quickly return," said RBS strategist Simon Peck. STRESS GAUGES EASE

What the cash grab has undoubtedly done, however, is to reduce financing risks for banks - the operations have provided funds to help institutions repay maturing debt after finding bond markets closed late last year. That financing amounts to some 750 billion euros in 2012, according to Credit Agricole, meaning some of the short-term positive effects on rates may wane as the cash is used to meet redemptions. But with those financing risks out of the way, indicators of financial system stress are expected to fall further. The spread between three-month euro Libor - the benchmark cost of borrowing on interbank markets - and the anticipated central bank rate (OIS) has narrowed to around 53 bps from over 90 in December. Forward markets point to that spread falling to around 35 bps by September as interbank rates come down. Credit Agricole strategist Orlando Green said he expected riskier assets to rise further after Wednesday's operation - sources have told Reuters the ECB wants it to be the last, which would be consistent with a fall in Euribor rates - another euro interbank rate."The general pace of decline in the three-month Euribor rate has been in a 0.4-0.8 basis point range, and there is nothing to suggest this move cannot continue at this pace," he said."As a consequence, the tightening of the Euribor-Eonia basis should continue, as an indication of diminishing banking liquidity risk."The three-month Euribor rate has fallen by more than 40 bps since the ECB's first operation on Dec. 23, reaching a 16-month low of 0.983 percent.

Money markets ecb loan repayments to weigh on short dated rates


Feb 20 The repayment of European Central Bank crisis loans could weigh on short-dated money market rates as long as excess liquidity remains above the 200 billion euros level that usually keeps a lid on rates. Banks have so far paid back around a third of the almost 500 billion euros in three-year loans they took from the European Central Bank in late 2011 and next week they can start repaying the other half trillion in loans they took in February 2012. The larger than expected initial repayment amount briefly led to expectations that the excess liquidity in the banking system - currently at just over 500 billion - would shrink faster than previously thought, causing a rise in money market rates, especially in those beyond the one-year maturity. ECB President Mario Draghi has cooled those expectations by saying he did not expect the repayments to cause a drop in excess liquidity below 200 billion and that he will monitor money markets to ensure monetary policy remains accommodative.

This week's developments in overnight interbank lending are strengthening the view that money market rates should remain low in the near term, analysts said. The overnight Eonia rate settled at a record low of 0.058 percent on Monday in the day that coincided with the highest volume of overnight rates for this year - 24.2 billion euros. The average daily volume in 2013 was 17.6 billion euros.

"The key argument here is that higher volumes would lead to lower fixings. It could be a manifestation of core banks paying back funding from the ECB and becoming more active in the market as a result," RBS rate strategist Simon Peck said. Peck said Eonia fixings could fall further in the near term, but not significantly.

"What would drive Eonia fixings materially lower is any expectations of a deposit rate cut (from the current level of zero percent), which if you see a worsening in the (euro zone) outlook could become a relevant discussion again," he said. For now, such expectations are contained by a recent improvement in business sentiment across the euro zone, especially in Germany. Commerzbank rate strategist Christoph Rieger said an increase in volumes to 31.3 billion euros, the highest seen since the ECB cut the deposit rate to zero in July, would lead to a 1.5 basis points decline in Eonia fixings. He said the relationship between volumes and Eonia fixings, as well as the view that the excess liquidity would remain ample, warranted receiving positions in Eonia forward rates with maturities until September - effectively a bet that those rates will remain subdued.

Money markets overnight ecb borrowing jumps but seen temporary


LONDON, March 13 Borrowing of overnight funds from the European Central Bank jumped as banks prepared to tender new Greek bonds as collateral at the central bank's refinancing operations after the country's successful debt restructure. Borrowing from the overnight facility rose to 15.6 billion euros from 632 million euros the previous day, ECB data showed on Tuesday, but this was largely expected to fall later in the week as they receive cash from the ECB's seven-day tender. The ECB stopped accepting Greek bonds early last week after the country's debt was pushed into 'selective default' as a result of its debt restructuring but lifted the ban after the deal went through at the end of the week."Newly exchanged Greek bonds were waiting to be submitted into today's ECB Main Refinancing Operation and that cash was being borrowed at the marginal rate until such funds are settled tomorrow," ICAP analyst Chris Clark said."If this is indeed what happened, we should see a similar figure being borrowed tonight before that number returns to normal once MRO funds are settled tomorrow," he said.

Bank demand for the ECB's weekly loans also rose to 42.2 billion euros from 17.5 billion euros last week, well above an average of 18 billion euros in a Reuters poll on Monday. This was likely due to banks front-loading funds to meet the level of cash they are required to keep at the ECB at the beginning of its maintenance period. The increase in weekly borrowing was unlikely to have much impact on a market that is already flush with cheap three-year cash from the ECB. Interbank rates hit fresh 17-month lows on Tuesday as the excess liquidity from the ECB's two ultra-long financing operations over the past months exerted downward pressure.

Bank-to-bank lending rates have dropped by more than a third over the last few months as a result of the 1 trillion euros the ECB has poured into the financial markets, and they are homing in on record lows they hit in early 2010. 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 to 0.876 percent from 0.884 percent, the lowest level since September 2010. Equivalent Liobr rates also fell.

Rates in other maturities also dropped. Six-month rates fell to 1.183 percent from 1.193 percent and 12-month rates dropped to 1.519 percent from 1.527 percent. One-week rates, the most heavily influenced by the level of cash in the system, held steady at 0.317 percent. Overnight rates slipped to 0.355 percent from 0.359 percent."With so much excess liquidity in the system, we expect Eonia to continue to trade at an approximate 10 basis points spread to the deposit facility and for Euribor fixings to continue drifting lower as tail funding risks have receded," Morgan Stanley strategist Elaine Lin said. The three-month lending rates have already dropped by over a third since the ECB announced plans to lend banks three-year money back in December, but are still well above the low of 0.634 percent they hit in early 2010.

Money markets quarter end buying boosts treasury bills


Quarter-end buying on Thursday helped send short-dated Treasury bill rates to recent lows, though yields remained far above levels reached in January as money funds saw continued outflows and the Federal Reserve sold short-dated debt. Three-month Treasury bill yields dropped by almost a basis point to 7.37 basis points, the lowest since March 6, while one-month bills fell to 2.29 basis points, their lowest since Jan. 25. Investors typically flock to safety assets including Treasuries at quarter-end before resuming purchases of riskier assets in the new quarter."There has been decent T-bill demand with quarter-end coming up and a bill maturity today, it all seems to be supporting our sector," said Mike Lin, director of U.S. dollar funding at TD Securities in New York. The cost banks pay to borrow excess reserves overnight extended its recent drop. The fed funds effective rate fell to 13 basis points from 14 basis points on Wednesday. The three-month London interbank offered rate also slipped on Thursday, fixing at 0.46815 percent, the lowest since November, and down from Tuesday's 0.46965 percent.

It is down from around 58 basis points at the beginning of the year, but up from lows of around 25 basis points in mid-2011. Short-term U.S. debt yields remained near recent highs, despite improvement on Thursday, and a number of factors are weighing on the debt and likely to keep rates relatively elevated. U.S. money funds, which are large buyers of short-dated debt, continued to see outflows in the latest week, with assets falling by $9.77 billion to $2.585 trillion in the week ended March 27, the Money Fund Report said on Wednesday.

The funds have seen dramatic declines outflows since January as fears over contagion from Europe's debt problems ebbed and as money funds face new regulations that could reduce their appeal to investors. The Federal Reserve also sold $8.622 billion in short-dated debt on Thursday as part of its "Operation Twist" program, which involves selling shorter-term debt to fund long-term purchases in a bid to lower rates. A possible risk factor for the repurchase market may also be whether the Treasury will consider a so-called sterilized quantitative easing, which would involve trying to offset the risk of inflation from new bond purchases with open market operations, such as reverse repos, to drain bank reserves.

The Treasury is expected to poll primary dealers next month as part of its regular survey on issues in the bond market and a question on sterilized easing could pressure repo rates if it were included, said TD's Lin."If they put that down as a question it could be something that the market gets concerned about because it means it really is being thought about, even if it doesn't necessarily mean they will enact," he said. The cost of borrowing overnight in repos backed by general collateral traded at around 18 basis points on Thursday, after closing on Wednesday at around 10 basis points. In Europe, euro zone bank-to-bank lending rates fell to a fresh 20-month low, driven lower by excess liquidity and the prospect of a long period of record low interest rates. Three-month Euribor rates, traditionally the key gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 0.783 percent on Thursday - the lowest level since the start of July 2010 - from 0.787 percent the previous day. The market believes that rates may fall close to those levels in the coming months. Euribor futures showed markets were anticipating three-month rates to fall to 0.65 percent by September.

Money markets short term rates rise after ecb praets comments


LONDON Dec 12 Short-term money market rates rose on Wednesday as traders lowered expectations of further monetary easing by the European Central Bank after its chief economist said there was limited room for further cuts. Eonia forward contracts, used to speculate on where overnight lending rates will be at specific point in the future, broadly reversed the fall into negative territory seen after last week's ECB meeting. The rate on contracts dated from March next year through to July rose fractionally back above zero as traders reacted to comments from the ECB's Peter Praet. August contracts remained in negative territory. Praet said there was little room to cut the main lending rate below the current record low of 0.75 percent and cautioned over the effects of a cut below zero on the rate the central bank currently pays on deposits.

Those comments dashed expectations of a negative deposit rate which had built up after ECB President Mario Draghi said a depo rate cut had been discussed by the governing council and the bank was operationally ready for such a move.

"(The market) is paring back those expectations of a depo rate cut," said Benjamin Schroeder, strategist at Commerzbank."Maybe they have put too much hope in such discussions and now they are seeing that the ECB itself is seeing little benefit in actually lowering the deposit facility rate," he said, adding the discussion was still open.

Key Euribor bank-to-bank lending rates rose after Praet's comments, with the three-month Euribor rate rising to 0.183 percent compared to 0.181 percent in the previous session. The equivalent Libor rate, set by a smaller panel of banks in London, was 0.12286 percent, up from 0.12071 percent on Monday.

Money markets signs of euro zone bank fears quietly mount


* 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".