Financial industry, Savings & Stock markets - Business news

Money markets european dlr funding costs cheapest in 15 months

A barometer of dollar funding risk reached its best levels in more than a year helped by the prospect of European Central Bank intervention but was seen stabilising from current levels. The ECB's promise to buy bonds of struggling euro zone states, as well as expectations the Federal Reserve may soon embark in a third round of quantitative easing, has improved sentiment towards riskier assets generally, underpinning European stock markets and Italian and Spanish sovereign debt. That backdrop has driven the STOXX Europe 600 banking index to its highest in nearly 6 months, reduced the perceived risk attached to owning debt issued by certain European banks and made it less costly for euro zone banks to access dollar funding. The three-month euro/dollar currency basis swap , which shows the rate charged when swapping euro interest payments on an underlying asset into dollars, was at its tightest since June 2011."That is a proxy of European risk appetite and the narrowing in basis is a reflection of decreased tail risks following the ECB's new support measures " Simon Peck, rate strategist at RBS said.

"Today we have seen three-month euro/dollar cross currency basis move a further two basis points tighter as we have successfully navigated the German constitutional court vote on the legality of the ESM and ... another tail risk."Spanish and Italian bonds rallied and German debt prices fell on Wednesday after Germany's top court gave the green light to the euro zone's new bailout fund, prompting relief the bloc's rescue plans remained on track.. The three-month euro/dollar currency basis swap narrowed to minus 25 basis points from minus 27 bps the day prior, having reached minus 160 bps in November last year when the euro zone debt crisis escalated.

RBS's Peck said there was limited scope for further tightening."The narrow levels at the moment are really (based) on happy outcomes for the likes of Spain and Greece but there remain very sizeable risks that we will not see such good outcomes," Ciaran O'Hagan, strategist at Societe Generale said.

Analysts say intervention will not provide a quick fix and some flag the inherent contradictions in the ECB's strategy. For the central bank to intervene in the market, countries have to ask for a bailout first. But for Spain to seek financial help, it would have to be losing access to financial markets, meaning its borrowing costs would have to be at prohibitive levels, analysts say. Spain's Prime Minister Mariano Rajoy suggested as much when he earlier said his government continues to study the price of seeking assistance but improved market conditions may make aid unnecessary. The one-year euro/dollar currency basis swap was also at its narrowest since July 2011 at minus 29 bps, but one money market trader said he expected it to stabilise at around -25 bps given potential risks ahead."The whole feel-good factor has come back to markets," the trader said. "How long it will last, I am not 100 percent sure."

Money markets key euribor up 1st time in 3 mths, ecb cut hopes fade

* Three-month Euribor rate rises for first time in 3 months* Money markets give up on the idea of a deposit rate cut* Eonia, Euribor rates may have bottomed outBy Marius ZahariaLONDON, Oct 1 Key Euribor interbank lending rates rose on Monday for the first time in three months as expectations that the European Central Bank could cut interest rates this week are fading. Money markets are also in the process of pricing out the possibility that the deposit facility rate will ever be cut into negative territory from the current zero percent. Only a minor chance of such a move is factored in for the start of next year, but some banks are recommending clients to exit such bets or position for a rise in January-dated rates. Economists polled by Reuters expect the ECB to leave its main refinancing rate flat at 0.75 percent at its meeting on Thursday. The three-month Euribor rate, traditionally the main gauge of unsecured bank-to-bank lending, rose to 0.223 percent from 0.220 percent.

"This points to more uncertainty creeping into the market with regards to any future rate cuts," said Elwin de Groot, senior market economist at Rabobank."Rates are very low already and there's basically only one thing that could push down money market rates even further, and that would be a cut in the deposit rate. But that seems not to be a subject of discussion within the ECB."ECB Executive Board Member Benoit Coeure said last week that a cut in the deposit rate, a move that would effectively charge banks to hold money with the ECB overnight, may not be beneficial for all segments of the market. Imposing a penalty for parking cash at the central bank could shake things up in the dormant euro zone money markets and sway banks to take the risk of lending to each other more to get a return on their cash.

Healing money market segments that have been frozen by the euro zone debt crisis is seen as an important step towards restoring sustainable economic growth in the region. However, the low level of short-term rates is already making some asset managers take cash out of money markets and put it in other assets such as bonds. The forward Eonia market, showing where investors expect the overnight Eonia rate to be at certain points in the future, is completely dismissing the probability of a deposit rate cut in October. The Eonia rate dated for the October meeting last traded at 0.09 percent. Eonia has fixed at an average of around 8 basis points over the deposit rate in the past few months.

BOTTOMING OUT The lowest points on a forward Eonia curve that covers the ECB's next 12 meetings are January and February at just above 0.05 percent. That compares with lows of about 0.03 percent hit last month. The 0.5 percent level prices in approximately a 10 percent probability of a deposit rate cut of 25 basis points, according to Commerzbank rate strategist Benjamin Schroeder. But ECB-dated Eonia rates may have already reached their bottom, analysts say. Societe Generale strategists recommend bets that the January Eonia will rise to 0.07 percent on the view that the ECB will leave the deposit facility rate unchanged. Rates beyond January may rise because the excess liquidity in the euro zone system, currently at 734.5 billion euros based on Reuters calculations, may start to shrink next year. Banks have the option to pay back the cheap three-year loans taken from the ECB in December starting with the end of January."Those rates need to price in some sort of premia for the uncertainty ... regarding liquidity conditions," Commerzbank's Schroeder said.

Money markets overnight repo rates steady, but may face pressure

* U.S. overnight repos steady near top of recent range* Europe investors seeking derivatives carrying longer maturitiesBy Chris Reese and Marius ZahariaNEW YORK/LONDON, Sept 21 U.S. overnight lending rates held steady o n F riday at the high end of a recent range, but they could ease early next year after a Federal Reserve stimulus program comes to an end, according to analysts at Barclays. The interest rate on overnight repurchase agreements were last quoted at 0.29 percent, unchanged from late Thursday. Overnight repo rates have generally been trading in a range of 0.17 percent to 0.31 percent since mid-January. Those rates could come under downward pressure early next year after the Fed winds up its stimulus program, dubbed "Operation Twist," under which the central bank is selling shorter-dated U.S. Treasuries and using the proceeds to buy longer-dated Treasuries in an effort to lower long-term borrowing costs like those on mortgages."As primary dealer inventories of Treasuries normalize after the Twist sales end, repo rates, in particular, should start to inch lower," Ajay Rajadhyaksha and Dean Maki, analysts at Barclays in New York, said in a research note.

The Fed last week announced a new open-ended program under which it will buy $40 billion of mortgage-backed securities per month, known as QE3, and said Operation Twist will continue as scheduled through the end of the year. As part of Twist, the Fed on Friday bought $1.784 billion of Treasuries maturing November 2022 through February 2031. Meanwhile, in Europe, investors dissatisfied with short-term interest rates close to zero are increasingly seeking derivative instruments carrying longer maturities, taking the risk of a sudden shift in central bank policy. Record low official European Central Bank interest rates and excess liquidity in the euro zone system of 750 billion euros, according to Reuters calculations, have pushed money market rates to record lows.

Speculation that the ECB could cut its deposit facility rate below the current zero percent, meaning investors would pay a fee to park their money, is putting even more pressure on rates. The overnight euro interbank rate, Eonia, last fixed just below 0.1 percent. Forward financial contracts that represent bets on where Eonia is going to settle at certain points in the future see the rate below 0.1 percent for the next two years. Searching for higher returns, investors are moving toward longer duration. This week, for instance, the four-year Eonia narrowed by 10 basis points to 0.40 percent.

Commerzbank rate strategist Christoph Rieger in Frankfurt recommends bets that the 1y1y Eonia forward -- a financial product that targets the level of a one-year Eonia contract starting in one year's time -- will fall to last month's lows of just above 10 bps from around 20 bps."Even if the ECB does not cut the depo rate further, which remains our base case, prospects of unchanged rates, abundant excess liquidity and potentially lower EONIA-depo spreads should be enough reasons to expand into this part of the curve," he said in a note. Societe Generale rate strategist Ciaran O'Hagan in Paris believes it makes sense to place similar bets even further out on the curve, even if the time period goes beyond the massive three-year cash injections made by the ECB last December and in February. The main risk investors are taking is a possible pick-up in the global economy that could prompt central banks to reverse or discontinue some of their more radical experiments in monetary policy easing. But given the state of the world's major economies and the depth of the euro zone debt crisis, investors seem willing to take the risk."Central banks around the world are going to continue to provide liquidity," O'Hagan said. "The long-term challenges we're facing are so severe and so dramatic that at the moment this is how you want to be positioned."

Money markets repo rates up on twist, may ebb near term

The cost for banks to borrow short-term funds backed by Treasuries has been trending higher as the Federal Reserve's Operation Twist program adds to a surplus of short-end debt supply. Analysts noted, however, that a number of other factors could stem the funding cost increases in coming weeks, at least temporarily. The U.S. central bank said last week that it will extend the Twist program by another $267 billion, until the end of the year. Twist involves selling short-term notes to fund purchases of long-dated debt, in a bid to lower consumer borrowing costs. This supply has flooded the short-term rates market and is likely to help to continue to drive up the cost of borrowing overnight funds using short-term Treasuries as collateral."The extension of Operation Twist will result in some continued pressure on repo rates on the margin because it's going to mean more competing supply in the front-end," said Brian Smedley, interest rate strategist at Bank of America in New York.

Average overnight rates in the interdealer market have increased to 22.5 basis points in the last month, and analysts see this likely to increase to the mid-20s level. The rate had traded at around 10 basis points last October. Analysts at Barclays also attribute some of the rise in the rates to new, possibly lower-rated banks adding market share in the market as the Federal Reserve pressures the industry to reduce risks posed by the dominance of three large banks.

Other factors in the coming weeks could stem rate increases, however, even if only temporarily. Some banks have been using repo to secure extra cash cushions in recent weeks as Greek elections and bank downgrades by Moody's Investors Service threatened new volatility. With these events now over, the banks may reduce these positions."In the last month or two it appears that some banks have built up a bit of an excess liquidity buffer leading up to the Greek elections and Moody's downgrades, and that has contributed to some upward pressure on repo rates," Smedley said.

"In the coming weeks we'll see if banks feel more comfortable trimming back that excess liquidity," he added. Decreasing appetite heading into quarter-end at the end of this week could also reduce pressure in the market, adding to a temporary decline in rates. Longer term, a deteriorating economy could push repo borrowing rates back down if the Fed launches new quantitative easing to further stimulate growth. Some economists expect the Fed could launch a third round of easing, focused on purchases of mortgage-backed bonds as soon as its meeting in September.

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 sub zero ecb deposit rate no longer unthinkable

Euro zone money markets have been wary of pricing in any prospect that the European Central Bank might cut its deposit rate below zero, but there are signs that such an unprecedented move is no longer considered unthinkable. The forward euro zone EONIA overnight interest rate for December traded at 6 basis points on Friday, less than the average spread of 8 basis points over the ECB's depo rate seen in the past few months. The rate projected for December is just half of Thursday's 0.12 percent EONIA settlement and indicates that the market is pricing in a tiny possibility that the ECB deposit rate may go below zero later this year."It does not seem to have been any serious flows in the market yet, but some in the market are starting to talk about this," said Max Leung, an interest rate strategist at BofA Merrill Lynch Global Research. Recent comments from ECB policymakers suggested that the central bank is keeping the door open for further easing, but the form any such step would take is unclear.

If the ECB ever does cut its refinancing rate from the current record low of 0.75 percent, the question arises whether it will keep the gap over the depo rate at the usual 75 basis points. If the deposit rate turned negative, the ECB would have to change the way it manages banks' excess reserves in the current account as well if it wants to penalise banks for parking cash in the ECB's safe coffers rather than lending to each other or to businesses. The only certainty in the market about the ECB's next move is that it will not cut the depo rate again in the near future, because it will take several months to assess the full impact of the July 5 cut to zero.

Many are already expressing serious doubts that the zero rate will spur activity in the interbank market and filter through to the real economy. In fact, some of the biggest money managers have already restricted access to European money market funds due to the almost non-existent returns. Besides, most banks are not lending because they do not trust each other and that may not change even if they are penalised for it."In an environment where it is return of capital that counts, rather than return on capital, you may well have to pay someone to be the guardian of your money," said Simon Peck, rate strategist at RBS.

"Just because the deposit rate is zero or going lower doesn't necessarily imply that straight away you can change your risk management framework."Peck said a further cut in the depo rate would push returns on short-term bonds issued by top-rated countries such as Germany even deeper into negative territory. Two-year German yields last traded at minus 0.06 percent."Theoretically, it's even possible for Eonia rates to go negative going forward," said Peck. BofA Merril Lynch's Leung said Euribor futures , which currently trade around 99.60-99.65 on the 2012 strip -- implying the euro zone benchmark three-month interbank Euribor rate could fix at 0.35-0.40 percent later this year -- could "trade somewhere at 99.90, 99.95 or even 100."Three-month Euribor hit a new all-time low of 0.451 percent on Friday, fixing below the three-month dollar Libor for the first time since the beginning of 2008 in a sign of just how loose monetary conditions are.