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.
NEW YORK, May 15 Some shorter-term funding markets are reflecting rising strain in bank borrowing rates as concerns of a Greek exit from the euro increase, although funding costs remain below levels reached late last year. Europe's debt crisis has flared up on risks Greece could exit the euro zone. At the same time, Moody's Investors Service is conducting credit rating reviews expected to lead to widespread downgrades of regional and global banks. That is expected to increase some funding costs and send some subordinated bank bonds in Europe into junk territory. "There has been heightened risk in slightly longer term funding," said Ira Jersey, an interest rate strategist at Credit Suisse in New York. He noted that concerns are reflected "on a forward basis, not really now." Two-year interest rate swap spreads, a proxy for bank counterparty risk, reached their widest since January 10 on Tuesday, widening three quarters of a basis point to 38.25 basis points. The spreads have widened from 27.75 basis points at the beginning of May. The Libor-OIS spread, or FRA/OIS spread, for contracts that mature in early 2013 also rose to 50.2 basis points, up from 49.3 basis points on Monday and an increase from 41.6 basis points a week ago. This spread is seen as a gauge of banks' reluctance to lend. Other short-term funding indicators were relatively stable as central bank loan operations continue to support banks for the near term. The European Central Bank has loaned over 1 trillion euros in three-year loans to banks as part of its Long Term Refinancing Operation (LTRO). The liquidity injection has eased much of the funding concerns that hurt banks late last year. "Banks in Europe still have a ton of cash held over from the LTRO so it's not like there are a lot of funding needs, so therefore the risk of a near term default," said Jersey. The three-month London interbank offered rate was unchanged on Tuesday at 0.46585 percent, down from 0.46685 percent late last week.
The European Central Bank's cut in its deposit rate to zero may be slowly breathing life into euro zone unsecured money markets, though the evidence is far from conclusive. After a slight dip in August, mainly due to seasonal effects, volumes in the euro zone overnight Eonia rates market have inched higher this month and on one day last week topped 30 billion euros for the first time since April. This, to some analysts, is a sign banks are widening the list of counterparties they choose to lend to as record low rates prompt them to take more risk to increase returns on their cash."What we're seeing is that some of the high-quality banks have started to lend to lower quality banks. In order to get some remuneration they are willing to take more risks," said Barclays Capital rate strategist Giuseppe Maraffino. Daily average Eonia volumes for September are 25.7 billion euros, compared with 20.9 billion in August, 23.7 billion in July and 23.5 billion in June, according to Reuters data. In September 2008, before the financial crisis froze interbank lending, daily Eonia volumes reached more than 70 billion euros. The data diverges from volumes seen in the equivalent overnight Euronia rate, which is arranged by a much smaller panel of top-rated money brokers.
Since just before the ECB's July's deposit rate cut, volumes in Euronia have shrunk almost three-fold to just below 3 billion euros, according to Barclays data. Euronia last fixed at -0.0017 percent, compared with 0.095 percent for Eonia. The Euronia data suggests that trade among top-rated money market players are shrinking in volume while the Eonia data suggests some of those players may be lending to perceived lower-rated counterparties."This is a very encouraging sign. If the improvement in market sentiment continues, (Eonia) volumes should continue to rise," Maraffino said.
Euronia is fixed in the UK by the Wholesale Markets' Brokers Association, while Eonia is calculated in Frankfurt by the European Central Bank. TOO EARLY TO TELL However, there is an important shortcoming to the hypothesis that banks are beginning to expand the list of lenders they want to do business with again -- the fact that usually banks need more cash for window-dressing before the end of a quarter.
"There is more lending going on and this is consistent with the overall developments in markets," Commerzbank rate strategist Benjamin Schroeder said, referring to an increase in investors' appetite for risk following the ECB's rate moves and its pledge to buy potentially unlimited amounts of government bonds."But it may also be related to quarter-end activity so I don't know if we should read too much into these volumes at this stage," Schroeder added. A turn for the worse in general sentiment is also possible, with investors uncomfortable with the fact that Spain, at the forefront of the euro zone crisis, appears reluctant to ask for a bailout and activate ECB bond-buying. Outside interbank markets, some money market players have also noticed an increase in demand for cash products."We see continued growth (in demand for) assets up to one-year," said Shahid Ikram, chief investment officer at Aviva Investors in London."Zero-rate policy from central banks has meant that corporates and banks have been able to issue very efficiently and there has been significant demand for that."
* Markets price a steady ECB* Effect of any surprise rate cut seen limited* Focus shifting to excess cash repaymentsBy Kirsten DonovanLONDON, Nov 5 Euro zone money markets aren't expecting the ECB to alter policy this week, leaving the focus on whether banks will start next year to repay excess cash they have borrowed from the central bank or just keep hoarding it. Markets have all but priced out the possibility the European Central Bank will cut the rate it pays to deposit cash overnight from its current zero percent and economists polled by Reuters expect the main refinancing rate to be kept at 0.75 percent on Thursday. ECB officials have indicated the central bank doubts another rate cut would have much impact on the economy, leaving the focus on unconventional measures such as the cheap long-term liquidity it has pumped out over the past year and the bank's new bond-buying option.
"You can understand how the market is interpreting that it won't be conventional measures that will be the way forward for boosting confidence ... and is moving away from expecting further rate cuts," said Credit Agricole rate strategist Orlando Green. The euro zone debt crisis has abated since the ECB detailed a plan to buy the bonds of struggling euro zone countries if they ask for aid. Spain is seen as the most likely candidate although it has yet to make a move. Forward overnight Eonia rates - which reflect expectations of where the deposit rate will be set - are at most just a couple of basis points below current levels, indicating markets see the rate staying at zero percent.
"We think the ECB will shy away from cutting the deposit rate into negative territory," said Commerzbank rate strategist Benjamin Schroeder. Although a negative deposit rate may spur banks to lend more, it deters money market funds and some, such as BlackRock Inc - the world's largest money manager - have restricted investor access to European funds. It is, however, much harder to measure expectations of a refinancing rate cut because the near 700 billion euros of excess cash banks are currently holding distorts the traditional calculations used before the financial crisis.
Even if the ECB does surprise on Thursday by cutting the refinancing rate, reaction in money markets would likely be somewhat subdued with overnight rates pinned by deposit rate expectations. Euribor interbank lending rates could fall further, analysts said, but the move may be limited with the spread over equivalent maturity Eonia rates having already collapsed to just 10 basis points - nearing levels seen before mid-2007. Eonia rates in theory strip out the risk of a lender or borrower defaulting. The three-month Euribor rate resumed its downtrend on Monday, inching down to 0.196 percent, but has shown signs of bottoming out with unchanged fixings late last week. With little prospect of rate cuts, markets have turned their attention to how much of their excess cash - borrowed at three-year tender operations in December and February - banks will repay with some estimates putting the figure at 200 billion euros."Looking at forward Eonia rates, markets don't expect an amount of liquidity to be drained that will have an impact on rates," said Commerzbank's Schroeder."It's only once excess liquidity drops below 100 billion euros that you see an impact on the Eonia fixings," he added.
Jan 16 Some fixed income investors are getting nervous that the United States may have to delay debt payments due in February and March, as negotiations in Washington over how to cut spending and raise the debt ceiling again look likely to drag out until the last minute. The U.S. Treasury said on Tuesday it was temporarily tapping the retirement funds of government workers to avoid hitting the $16.4 trillion debt ceiling. It has said it can only stave off default through such extraordinary measures until around mid-February to early March. Market reaction to the risk of a U.S. default so far has been relatively muted, but some investors are starting to pull away from Treasuries that mature in that time frame."There's been a little bit of volatility in the bill market. People are already avoiding some of the bills that expire right around the end of February and in early March," said Mary Beth Fisher, head of interest rate strategy at Societe Generale in New York. Yields on some one-year Treasuries notes that mature on March 7, for example, have jumped to 10 basis points, from 2 basis points at the beginning of the year. The cost of insuring U.S. debt in the credit default swap markets has also increased. CDS that would insure against a default for 6 months have jumped to 20 basis points, the highest level in six months, and up from 8 basis points at the beginning of the year, according to data from Markit.
"We're seeing not only price action but we're seeing flows that are consistent with a bit of a fear. We think the bigger risk is in the Feb 28 to March 28 zone," said Kenneth Silliman, head of short-term rates trading at TD Securities in New York. The delay in raising the ceiling is the second time investors have faced the possibility of a U.S. debt default. A standoff over the issue in mid-2011 led to Standard & Poor's downgrading the U. S credit rating from the top AAA. This time around, many investors may be more prepared and more averse, and some fear market reaction could be worse.
Money market funds, which are large lenders in repurchase agreements that are backed by Treasuries and other collateral, are not allowed to accept defaulted bonds to back loans. They pulled back from loans in 2011 and most expect they will again if the negotiations drag out."This time, flight risk is even higher," said Michael Cloherty, head of interest rates strategy at RBC Capital Markets in New York. Most money funds loans are made overnight, which leaves banks and other borrowers vulnerable to sudden pullbacks. The funds also have the option to terminate any loans with seven days' notice.
Borrowers in repo also have the option to offer Treasuries as an alternative to mortgage-backed securities and other bonds used to back loans, which may mean asset aversion could spread to other markets and mortgage rates also risk a spike."We expect term financing liquidity to become very poor, and think there is real risk in financing rates rising sharply," said Cloherty. Some hope that lawmakers are more aware of the dangers of dragging out the debate as uncertainty threatens to harm economic growth. There are also some reports that Republicans may shift the fight from the debt ceiling to the so-called "continuing resolution."The failure to pass this measure would shut down the government, but avoid a more calamitous debt default. That said, there are also dangers of too much complacency on the issue, or putting too much faith in U.S. politicians."Markets are likely to ignore the debt ceiling till the last minute, or even later, and then react on panic if it gets breached," Steven Englander, head of global G10 currency strategy at Citigroup, wrote in a note on Wednesday.