Business & Finance | Financial news

Money markets euribor slips as ecb cut expectations grow


* Euribor, euro Libor both fall, seen sinking further* ECB rate cut expectations stoked by Coeure commentsBy William JamesLONDON/FRANKFURT, June 21 A growing conviction that the European Central Bank will cut interest rates pushed interbank borrowing costs lower on Thursday, with markets pricing in a slide to record lows. Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending and a proxy for the direction in which the ECB's refinancing rate is headed, eased to 0.655 percent from 0.657 percent. The interbank market is awash with cash injected by the ECB, depressing Euribor rates to within 2 basis points of their lows but analysts expect rate cut speculation to drive rates lower before the next policy meeting on July 5.

The euro zone's struggling economy is putting additional stress on countries struggling with a debt crisis that currently threatens Spain's ability to raise funds from the market and is piling pressure on the ECB to act."I can't see the world changing sufficiently to derail market belief that the ECB will provide another cut," said Eric Wand, strategist at Lloyds Bank in London."Put it this way, if the ECB stays where it is, the market would take it pretty badly. It seems like a cut is in the offing."

The euro-denominated Euribor rates pushed lower after fresh hints from ECB policymakers that the bank's deposit rate could be cut, a move that would open up room for a further drop in market rates. Banks will only lend in the open market if borrowers are prepared to pay more than the ECB. ECB Executive Board member Benoit Coeure said on Wednesday in an interview with the Financial Times that rate cuts remained an option and would probably be discussed at the next meeting, but that any move would not be a cure-all.

Euribor futures edged higher with contracts dated out to the end of the year rising by around two ticks. Prices imply Euribor falling below the record of 63.4 bps by next month, reaching as low as 51 bps by December. Three-month euro Libor, fixed by a smaller panel of banks based in London, also fell to set a new low at 0.56479 percent. Technical analysis by Futurestechs showed the outlook for the March 2013 contract, currently trading at 98.465, was bullish and protected by solid support around 9 9 .34 - a rising trendline between recent lows. Expectations of a cut to the ECB deposit rate - the amount of interest paid on cash parked overnight at the bank - were reflected in the market for fixed-term Eonia. Lending at a fixed-term Eonia rate for anything longer than two months requires offering a price below the 25 basis points currently on offer at the ECB. The three-month Eonia rate was last at 21 bps.

Money markets euro rates ease but record cash parked at ecb


* Liquidity glut pushes interbank rates lower* Banks park record amounts of cash at ECB* Interbank lending largely frozen due to debt crisisBy Emelia Sithole-MatariseLONDON, Jan 6 Interbank rates hit their lowest in nearly nine months on Friday, weighed down by a glut of liquidity in the euro system but interbank lending remains largely frozen as the euro zone debt crisis batters investor confidence. Italian bank UniCredit did little to foster confidence in the European financial sector after it was forced to deeply discount a planned one-for-one equity rights issue, highlighting the problems banks face raising funds. The European Central Bank pumped almost half a trillion euros in three-year loans into the system last month in an effort to ward off a fresh credit crunch, but most of these funds are making their way back to the bank's overnight deposit facility.

Banks parked a record 455 billion euros in overnight deposits at the ECB, data showed on Friday, reflecting their preference for the safety of the central bank to the higher interest rates they could get from lending to each other. They are currently returning to the ECB around two-thirds of a total 685 billion euros it has lent them, including from last month's unprecedented three-year liquidity operation."Risk aversion continues to dominate ... Actual trading is still very much on a name-specific basis," Kevin Pearce, senior broker at ICAP, said."Trading in the week remains thin on both a reluctance to lend and, with banks so long of liquidity, a lack of general bids."

The hunt for safety is also evident in moves at the short end of core euro zone debt curves, with benchmark German Treasury bill yields falling further into negative territory, indicting investors are willing to pay to hold the paper. The injection of cheap funds from the central bank has, however, helped ease some of the tensions in money markets and is keeping interbank offered rates subdued. London interbank offered rates for three-month euros have fallen around 30 basis points since late October to 1.22857 percent, their lowest since last April. Equivalent Euribor rates are also at their lowest since April.

But while the excess is seen keeping key euro priced money markets rates subdued, analysts say dislocations in the interbank markets are likely to remain elevated for as long as the euro zone sovereign debt crisis remains unresolved."Euribor fixings are dropping but there's little turnover behind those rates so it's not an indication to say things are getting better," said Benjamin Schroeder, a strategist at Commerzbank."We've seen an improvement but the underlying problems have not been solved."Analysts hold little hope that a meeting between German and French leaders on Monday will advance the search for a resolution to a crisis now in its third year. Angela Merkel and Nicolas Sarkozy are instead expected to focus largely on strategy for a European Union summit on Jan. 30.

Money markets firmer us bill rates likely temporary


* Firmer U.S. bill rates seasonal, technical * Commercial paper issuance shrank in latest week * Short-term eurozone rates steady after ECB policy meeting By Ellen Freilich NEW YORK, March 8Short-term U.S. Treasury bill yields have edged higher since January, a phenomenon that may persist into April and could present an opportunity for some buyers. The yields "might still be insignificant to some," but the change could be "relevant for investors who maintain larger cash balances," said Anthony Valeri, investment strategist, fixed income for LPL Financial. Such levels might be insignificant to some, but the increase is relevant for investors who maintain larger cash balances, said Valeri, adding that the higher Treasury bill yields are a function of temporary supply-demand trends. Treasury issuance tends to be greatest during the second quarter of the fiscal year when the government needs cash to pay tax refunds. But the Treasury said in early February it would increase bill issuance to meet that need, rather than increasing note and bond issuance, Valeri noted. "The usage of special 'cash management' bills increased supply and helped push T-bill yields higher," he said. Second, since mid-January money market mutual fund assets have declined by $54 billion, according to ICI data. Money market funds have also returned to European-based issuers, after essentially halting purchases in mid-2011, Valeri said. So along with the net sales that have pushed up T-bill and other short-term security yields, buying of those instruments has been tempered by a desire to slowly diversify back into Europe as risks there have receded, he said. Finally, on a more technical note, bond dealers have maintained very light inventories of corporate bonds and mortgage-backed securities, reducing the need to finance such positions via the repo (secured lending) market, Valeri said. Concurrently, the supply of bonds available as collateral for repo transactions has increased, leading to higher repo rates which in turn helped push T-bill and short-term security yields higher, he said. While most of these influences should prove temporary, "the modest rise in short-term yields provides a window of opportunity for investors with greater need for cash-like investments," Valeri said. Elsewhere in the short-term lending world, the U.S. commercial paper market shrank for a fourth week in a row, suggesting businesses are doing less short-term borrowing, Federal Reserve data released on Thursday showed. In the week ended March 7, commercial paper outstanding fell $1.7 billion to $925.6 billion on a seasonally adjusted basis, the Fed said. One reason for that could be corporations' ability to issue longer-term debt at attractive rates. In the first two months of the year, global corporate new issuance got off to its fastest start in three years, with debt sales totaling $543 billion, according to a recent report from Standard & Poor's. Of this amount, 44 percent was issued by companies from Europe, 32 percent by U.S. companies, 14 percent from the emerging markets, and 10 percent from other developed countries, the report said. Overseas, short-term euro zone interest rates held steady after the ECB's policy meeting on Thursday. The European Central Bank said the bloc's gradual economic recovery might take slightly longer than previously thought and added that inflation might also be more stubborn. Fixings of benchmark interbank rates such as Euribor and Libor should continue to grind lower, driven by the bank's injection of around a trillion euros in two rounds of ultra-cheap three-year loans. The three-month euro Libor rate fixed at 0.81429 percent versus Wednesday's 0.82400 percent. The rate has dropped by almost half-a-percentage point this year.

Money markets ltro anticipation, collateral noise pushes up rates


Jan 17 Short-term money market rates, which reflect banks' borrowing costs, rose to their highest level since July on Thursday, as anticipation built ahead of the first repayments of the ECB's three-year LTRO loans. Next Friday the ECB will publish how much of the 1 trillion euros it dumped on the banking system at the end of 2011 and early 2012 will be paid back by banks when they get the first opportunity to return the money on Jan. 30. The central bank has also recently cooled expectations of another interest rate cut and the two factors have triggered the first major spike in money market rates since the ECB flooded the banking system with its ultra-cheap cash. Suggestions that banks may also have to provide more detail on the collateral they exchange for cash at the ECB, something which could ultimately restrict banks' usage of the cheap loans, added to the upward momentum. It is something the ECB has already done with hard-to-value asset backed securities and comes as the central bank looks to get a better feel for the risk it is taking when it lends potentially unlimited amounts to banks.

The one-year Eonia rate hit a peak of 0.17 percent on Thursday, its highest since early July and up around 5 basis points on the day. The rise in fixed-term Eonia contracts, which lock in an overnight borrowing rate over longer periods, indicates that tighter liquidity conditions could force up short-term lending costs going forward.

"The market is worried about the impact that the first large repayment of the three-year LTRO could have on the (Eonia) fixings," Alessandro Tentori, head of global rates strategy at Citigroup."Even though this might seem like a low probability event the repercussions on the market would be so big that people prefer to be short on balance... it's primarily a liquidity concern."The ECB's so-called long-term refinancing operations, or LTROs, were a key move by the bank's President Mario Draghi to prevent a debt crisis spreading across the financial system.

Reuters calculations show there is currently around 630 billion euros of "excess liquidity" sitting at euro zone banks. The markets moves show an effort to hedge against the risk of change in actual rates, but analysts say the daily fixings usually only start to move once liquidity drops below 200 billion."The impact on Eonia will depend on the reduction in excess liquidity. Given the non-linear relationship, it is likely that a repayment of more than 400 billion euros is needed to move the spot level significantly," Deutsche Bank strategists said in a note to clients. BNP Paribas, Commerzbank and Santander are among a growing number of banks wanting to repay the emergency loans to distinguish themselves from weaker rivals.

Money markets ltro payback calm suggests unconventional ecb steps ahead


* LTRO paybacks raise chance of market rate rise* Pricing shows steps expected from ECB to neutralise move* ECB options include lending support, forward guidance, QEBy Marc JonesLONDON, April 24 The relaxed view of money markets to the quicker-than-expected repayment of the ECB's LTRO crisis loans suggests many players expect the central bank to delve back into its unconventional policy toolbox before the end of the year. In the last two weeks banks have returned just over 10 billion euros and the average weekly payback has risen over the past four weeks by almost a third to 9.2 billion. If that pace is maintained, the 330 billion euros of excess liquidity held by euro zone banks could fall to 200 billion - the level at which market rates have historically started to rise - in just over three months. Add to that the fact that banks are also borrowing less at the ECB's weekly and monthly offerings of one-week and three-month funding and that trajectory steepens even more."Should the movement (LTRO paybacks) continue near term, markets might start to price in risks of less abundant liquidity conditions going forward," said Annalisa Piazza, a strategist at Newedge. This would see market rates rise and be a de-facto tightening of ECB monetary policy, the last thing it needs when the euro zone economy is deteriorating and other major central banks have the printing presses running hot.

But despite the trend in LTRO paybacks, markets are not yet suggesting interbank rates could rise. Overnight interest rates are flat across all maturities while longer-term rate expectations have fallen to record lows in recent days. There are two possible explanations for the apparent mismatch. The first is an expectation that LTRO paybacks will drop off in the coming weeks so that liquidity remains sufficient to keep rates at their current lows. That is not a universally-held view, however. While Italian and Spanish banks - which many believe took the lion's share of the second of the ECB's two LTROs in early 2012 - may need to keep the money, almost 290 billion euros remains to be repaid from the first one - more than enough to impact rates.

SUPPORT MEASURES The second possible explanation rests on the assumption that the ECB will have to dig back into its policy cupboard to help the euro zone out of its economic difficulties.

Weak data this week has bolstered the view that a traditional interest rate cut could come as early as next week, but there are also clear signs investors are looking for more. Euribor futures, which rise when rate cuts and other forms of policy loosening are priced in, are at record highs as far out as 2017, suggesting investors expect something from the ECB to neutralise the lower liquidity that would be in the system once the LTROs are repaid. Analysts are mixed in their views of what the ECB will do. The bank has a list of options ranging from tweaking rates and offering more cheap liquidity all the way to the type of full-scale quantitative easing being used by the Federal Reserve, Bank of Japan and Bank of England."At the moment market expectations are clearly for further action from the ECB. Not only just a refi rate cut but also unconventional measures in terms of forward guidance (on rates) and measures to support corporates in particular in the euro area's periphery," said Norbert Aul a rate strategist at RBC Capital in London."In the current market environment this is counter-balancing the pressure (on rates) you could get from the liquidity drain."Meanwhile, pricing also suggests that, like economists, markets remain sceptical about the chance of the ECB charging banks to deposit spare cash with it. There are technical and psychological difficulties which limit the appeal of such a move. Trading systems may not be able to handle negative rates, while ECB policymakers have cited how a similar move in Denmark resulted in banks charging customers more for loans."The expectation is that they will take other measures in the near future, be that pure monetary policy or non-standard measures. Personally I think we will see both before the end of the year," said one London-based euro money market trader."I reckon they will come up with something not dissimilar from the Bank of England's funding for lending scheme to target specific sectors of the economy, the private sector and small and medium sized businesses," he added.

Money markets see new cheap loans from european central bank in


* 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.