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Money markets euribor rates at lowest since march


* Euribor rates hit lowest since March 2011* Trader recommends being long Euribor futures* Complete normalisation of inter-bank market seen unlikelyBy Ana Nicolaci da CostaLONDON, Jan 26 Euro zone bank-to-bank lending rates fell to their lowest in nearly 11 months on Thursday with the European Central Bank poised to offer more 3-year loans in February . The cost of borrowing dollars for three months in the unsecured interbank market eased after U.S. Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank was ready to offer the economy additional stimulus after announcing it would likely keep rates near zero until at least late 2014. Ample central bank liquidity in global financial markets has improved sentiment towards riskier assets even as private creditors and Greece have struggled to reach a deal on debt swap talks, key for the country to avoid a messy default. But banks have remained reluctant to lend to each other."(The Fed verdict) underpins in general the theme that central banks are committed to low rates, are committed to providing the market with liquidity en masse," Norbert Aul, rate strategist at RBC Capital Markets said.

He said there could be further tightening in the spread between 3-month Euribor rates and overnight Eonia rates -- a measure of financial risk -- especially if the European Central Bank also sticks to a very low interest rate environment, with unlimited liquidity. But he added: "A complete normalisation of the interbank market is unlikely."Euro zone bank-to-bank lending rates fell to their lowest since March 2011 to 1.142 percent, and down from 1.149 percent in the previous session. The spread between the 3-month Euribor rate and Eonia overnight rates was 77 basis points, down from 79 basis points the day prior.

"The next major event (is) the 3-year LTRO, that's our focus," a trader said. "We are focusing on what the ECB are trying to achieve at the front-end."The European Central Bank is expected to allot 263 billion euros to banks at its second three-year tender in February, half what they borrowed last month, according to Reuters this month. . But the wide range of foerecast signaled high uncertainty among trader predictions."The Euribor fixings has continued to go lower and lower and I think this has given us a green light to stay very bullish at the front end of the European curve, Euribor futures, i.e. we think that yields are going to be lower for longer like the United States," the trader said. The three-month dollar Libor rate - a key interbank rate for borrowing dollars - fell to 0.5531 percent from 0.5566 percent.

CASH BUFFER The ample liquidity in the financial system and the prospect of more to come has improved appetite towards riskier assets, even as uncertainty over the outcome of Greek debt swap talks remained. Banks borrowed 3.47 billion euros from the ECB overnight, down from 3.62 billion the day prior. They deposited 484.13 billion euros at the deposit facility overnight, down from 485.79 billion euros the day prior."Heavy usage of the deposit facility does not tell us anything about whether banks borrow and lend this money to each other intra-day or over the long term, the only thing we can say is that this money does not get transmitted into the real economy," Alessandro Tentori, head of European fixed income strategy at BNP Paribas said. Greece's tortuous negotiations over a debt swap with private creditors entered a new phase on Thursday with focus on how much the ECB and other public creditors may need to contribute. If the ECB were to take losses on its Greek debt holdings, it would not affect the bank's 3-year liquidity provision, analysts said. But it could have an impact in money markets indirectly if the ECB scaled back its bond purchasing program. It could affect the market "to the extent that (the ECB) probably would have lower capability to buy government bonds in the market and hence the transition of liquidity through the SMP (bond-buying program) would be impaired," Tentori added.

Money markets hopes of ecb bond buying underpin trade


* Hopes high ECB will restart bond buying this week* Only limited relief seen from such a move* Market prices in 50 pct chance of rate cut by year-endBy Kirsten DonovanLONDON, July 31 Markets are pricing in around a 50 percent chance that the European Central Bank will cut interest rates again this year but are likely to react badly if they have to wait longer than a couple of days for it to revive its bond-buying programme. ECB President Mario Draghi said last week the ECB would do "whatever it takes", spurring expectations that the central bank will reactivate the Securities Market Programme (SMP) at Thursday's policy meeting. The SMP - which the Bundesbank opposes - has been dormant for months but would be used to buy Spanish and Italian bonds in the secondary market. The prospect of this has pushed yields on bonds issued by the two struggling countries sharply lower, but the rally is showing signs of running out of steam.

"Some of the confidence generated by Draghi is already fading - you can see that in the fall in Bund yields today," said BNP Paribas rate strategist Matteo Regesta."To make sure the relief rally we've seen is not further interrupted, at the very least we need a reactivation of the SMP. An interest rate cut by itself would fall short of what the market is expecting. Money markets aren't expecting a cut in either of the ECB's two main interest rates this week, or the "bazooka" option of granting the euro zone's rescue fund a banking license, allow it to exchange bonds it buys for fresh cash from the ECB. The main refinancing rate is at 0.50 percent, while the deposit rate paid to banks who park cash overnight is at zero. A cut in the deposit rate is increasingly priced in from September onwards, which would mean it would turn negative.

"Speculation may be overdone," said Commerzbank rate strategist Benjamin Schroeder."There are complications with negative rates but with the comments from the ECB members, the speculation could still run further."The overnight Eonia rate, which is currently around 10 basis points above the deposit rate, is indicated at around 2 basis points by year-end, suggesting a deposit rate of around minus 10 basis points.

PROMISES Financial markets are looking for a clear policy response from Draghi at the ECB's Thursday policy meeting . Nineteen of 24 euro money market traders polled by Reuters said the ECB will soon resume bond buying."The bar has been raised very high for the ECB to deliver something," Schroeder said. But analysts said even another round of bond buying would be unlikely to stabilise markets in the longer term, although it might ease the next few weeks combined with a sharp drop in new bond issuance over the summer period."It won't offer lasting relief, but it would allow August to be relatively stable," BNP Paribas' Regesta said."The real bazooka, even without activation, would be to grant the (euro zone rescue fund) a banking license... Just the presence of this vehicle with unlimited firepower would bring some peace to primary and secondary markets but we're not going to get that this week."

Money markets longer term rates seen low for a prolonged period


Investors dissatisfied with short-term interest rates of 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 towards longer duration. This week, for instance, the four-year Eonia narrowed by 10 basis points to 0.40 percent."Generally what we are seeing is that because you get next to nothing in the front end, people are willing to take on more risk and switch to longer durations," one trader said. Commerzbank rate strategist Christoph Rieger 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 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."I'm not saying that you can't reverse these positions in a few months, but certainly for now you do want to be positioned long OIS (overnight index swaps)," he said, referring to trades in which market players position to receive overnight rates in the future via Eonia-based derivative products.

Money markets market may price out ecb cut after inflation warning


Short-term euro zone interest rates held steady after the ECB's policy meeting on Thursday but could begin to price out the small probability of it cutting rates this year if Greece's debt swap deal proves successful. 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. For a table of new ECB projections, seeEuribor interest rate futures <0#FEI:> and overnight Eonia rate forwards, instruments usually used to gauge market expectations of moves in ECB benchmark rates, were little changed across the 2012-2013 strip after the comments and analysts said no rate move was priced in for the foreseeable future. Markets have not reacted mostly because they were still nervous ahead of a deadline for investors to swap their Greek bonds for new ones later in the day, a vital exchange for Athens to avoid a chaotic default. But most investors saw that scenario as a marginal risk. A senior Greek government official said on Thursday afternoon that over 75 percent of bondholders with eligible Greek debt had signed up for the bond exchange, meaning the deal is likely to go through. Once that is out of the equation, rates such as Eonia forwards may move higher as analysts leaned towards interpreting ECB President's Mario Draghi's tone at his news conference as somewhat hawkish after his comments on the upside risks for inflation."Money markets have to take it on board that the prospect of a rate cut has gone down over the past hour or so," said David Keeble, global head of fixed income strategy at Credit Agricole.

"Also, they will have to do with the cash that they've got, which is ample."He said 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. Also sensing a slight hawkish bias in Draghi's tone, Societe Generale's head of fixed income strategy Vincent Chaigneau said some of the Eonia forward rates across the 2012 strip might be too low.

"He was probably slightly on the hawkish side ... in particular he upgraded the inflation risks," Chaigneau said. "It would take a better outlook on growth for the curve to steepen, but maybe there's a bit of room in the September Eonia.""0.31 percent is slightly on the low side given that in the February MP (maintenance period) it averaged 0.36 percent. There is still a small probability of a cut priced in ... but the focus now is on the Greek (debt restructuring deal)."Banks are required to keep a certain level of cash with the ECB over the course of a roughly one-month maintenance period.

LIQUID AND CAUTIOUS The ECB has flagged its ample cash injections as a success and said things would have been much worse without the extra funds. But traders say interbank lending activity has not picked up markedly and many remain unconvinced that the worst for the euro zone is now behind."The financial system is incredibly stressed ... you've got to stay ultra cautious, ultra-liquid," said Peter Allwright, head of absolute rates and currency at RWC Partners, which has $4 billion under management. He said the front end of the core European yield curve was going to remain bid as investors remained worried about the risks the euro zone still faced and banks wanted top-quality collateral to secure their liquidity needs."Stay long in the front-end core markets," Allwright said. "It's a good, triple-A, high-quality collateral and there's a massive shortage of that ... I can easily see two-year Schatz yielding negative during the next round of stress."He mentioned poor economic data, high oil prices, the Greek and French elections as future potential crunch points that would increase stress in financial markets.

Money markets markets ready for ecb rate cut this week


* Rate cut bets remain despite EU summit outcome* Expectations based on deteriorating economy* Cut seen improving sentiment more than economyBy Ana Nicolaci da CostaLONDON, July 2 Money markets expect the European Central Bank to cut interest rates this week as the euro zone economy struggles, with policy action at the European Union summit having provided only fleeting relief to volatile sovereign debt markets. Forty-eight of 71 analysts expect the ECB will trim interest rates on Thursday, with most predicting a 25 basis point cut to 0.75 percent, where they will stay until 2014 at least. . The survey was taken before European leaders decided on a more flexible use of euro zone rescue fund last week, but given recent economic data and rhetoric from ECB policymakers, analysts are still betting on more monetary easing. Joblessness in the euro zone rose to a record high in May and lending to European firms contracted that same month, piling further pressure on the central bank to act."What has come out from the (summit) meeting can be a positive first step but is not conclusive or what is needed to tackle the crisis and tensions in the interbank market. So I expect ECB action, even if we are not sure that it will be so effective for the economy given that rates are already very low," Alessandro Giansanti, senior rate strategist at ING said. European leaders decided last week that euro zone rescue funds could be used to stabilise bond markets without extra austerity measures and recapitalise banks directly without increasing the country's budget deficit.

The outcome gave some relief to sovereign debt markets but had little impact on money markets, which are still discounting more monetary easing. CRACKS APPEAR There were already signs that the measures agreed - which surpassed market expectations - could face obstacles. The Finnish government told parliament on Monday that Helsinki and a like-minded administration in the Netherlands would block the euro zone's permanent bailout fund from buying bonds in secondary markets.

Three-month Euribor rates inched lower on Monday to 0.652 percent from 0.653 percent. That was within range of a record low of 0.634 percent hit in early 2010. Euribor rates were traditionally used as a gauge of interest rate expectations but excess liquidity in the market from two injections of long-term cash from the ECB has made it more difficult to use them as such. Even so, Giansanti said the market was fully pricing in a 25 basis point cut in the refi rate at Thursday's monetary policy."It will give a boost to sentiment, showing that the ECB is committed to doing what is needed to help the economy in the euro area," he added.

Eonia forwards are also showing markets are pricing in a reduction in the deposit facility rate. Eonia rates are seen reaching between 0.24 to 0.19 percent in September - below the deposit facility rate of 0.25 percent, which normally serves as a floor for overnight rates. Eonia rates were last at 0.38 percent. Speculation of a deposit facility rate cut has increased in recent weeks on the back of comments by ECB officials. Two ECB Governing Council members, Austria's Ewald Nowotny and Slovakia's Jozef Makuch, have said they could imagine the deposit rate going to zero. Simon Peck, rate strategist at RBS, said Eonia forwards were discounting an around 9 bps decline in the deposit facility rate in July. Peck expected the rate to be reduced to 0.10 percent or 0.15 percent this week from 0.25 percent currently and the refi rate to be cut by 25 basis points to 0.75 percent, with the possibility of a 50 basis point cut. He too thought the market impact would be more psychological than practical."It's more about signaling. It's a statement, it's the right policy move in the context of the weak data," Peck added.

Money markets short term rates edge lower after bank lending data


* Money supply data shows lending to corporates shrinks* Euribor futures bounce from session lows after the data* Concerns rise about banks' government bond holdingsBy Marius ZahariaLONDON, March 28 Short-term interest rates inched lower on Wednesday after data showed the glut of cash injected by the ECB has yet to find its way through to the real economy, reinforcing bets that monetary policy will remain loose for a long time. The monthly flow of loans to non-financial firms fell by 3 billion euros in February after rising by just 1 billion euros in January. Euribor futures rose by around 3 ticks from session lows across the curve after the data, reflecting expectations for easier monetary conditions going forward. Market participants said the move reflected that markets now expected any ECB exit strategy will be activated later than previously thought rather than increasing bets for an interest rate cut or more liquidity injections.

"The huge amount of liquidity not only in the euro zone, but also in the U.S., UK and Japan means that the level of yields in bond markets is quite low and this is leading the corporate sector to go to the market for funding, (and rely) less on bank lending," BNP Paribas rate strategist Patrick Jacq said."There is no hurry for the ECB to ease or exit."A Reuters poll showed the ECB was expected to keep rates on hold in the foreseeable future. At the same time, data showed Italian and Spanish banks used the cheap loans from the European Central Bank to stock up on domestic government bonds, increasing their dependency on the sovereign's ability to fight the debt crisis.

The new data, which captured the period just before ECB's record second injection of 3-year cash, showed Italian banks increased their holdings of euro zone debt by 23 billion euros, taking their total holdings to 301.6 billion euros. Spanish banks increased their holdings by a hefty 15.7 billion euros. While the rise was smaller than January's record 23 billion, it left total sovereign holdings at a record 245.8 billion euros. JPMorgan estimates the holdings of government bonds as a percentage of total banking assets is now around 8 percent for both Italy and Spain, which is the highest in the euro zone after Greek banks, whose government debt represents 10 percent of total assets.

"It's a big figure ... If at some point we have a reignition of worries about the sovereign, banks will suffer massively," said Nikolaos Panigirtzoglou, European head of global asset allocation and alternative investments at JPMorgan."What destroyed Greek banks was not the fact that their equity was wiped out, was not ... their loan book, it was their government securities."Meanwhile, in a further sign that dollar funding conditions have eased, banks borrowed only $6.25 billion for three-months, compared with $25.5 billion."This reduction in the usage of the ECB's dollar facility is not surprising, given that private markets are more readily providing dollars," said Elaine Lin, rate strategist at Morgan Stanley. The three month euro/dollar cross-currency basis swap , which shows the rate charged when swapping euro rate payments on an underlying asset into dollars, kept close to its tightest since August 2011 at around minus 55 basis points. 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.