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Money markets ecb easing bets increase as euro crisis intensifies


* September, October Eonia rates 5 bps lower than May Eonia* Markets pricing in chances for more ECB easing in 2012* Some strategists bet against the trend, thoughBy Marius ZahariaLONDON, April 23 Short-term euro zone interest rates are pricing in a rising chance that the European Central Bank may ease monetary policy further later this year as the sovereign debt crisis intensifies and the economic outlook worsens. Surveys showed on Monday the euro zone's private sector slump deepened at a faster than expected pace in April, dampening hopes that the bloc may come out of recession any time soon. The release adds to fears that the austerity measures planned in vulnerable economies such as Italy or Spain may simply make it harder to raise revenue to repay debt. Investors are slowly turning their heads to the ECB again for measures to mitigate the crisis. Forward euro overnight Eonia rates dated on future ECB rate-setting meetings this year have fallen in recent days, implying a further cut in the ECB's benchmark rate from its record low 1.0 percent, or some other additional official action to drive down borrowing costs. September and October Eonia rates briefly fell below 30 basis points on Monday, 5 bps lower than the May Eonia.

"It reflects the underlying bias of the market which is towards the ECB likely to do something down the line," FXPro chief economist Simon Smith said. The Eonia curve has been largely flat at 34-35 basis points since the ECB injected around 1 trillion euros ($1.3 trillion) into the banking system because markets had largely expected the ECB to stand back and watch for a while. Commerzbank rate strategist Benjamin Schroeder also takes the recent fall in Eonia rate forwards dated towards the end of the year as a sign that markets now think the ECB's stand-back stance may not last as long as previously thought."Markets are looking at ECB rate cuts down the road as the economic situation deteriorates with the austerity going on in euro land," Schroeder said.

"But I don't think the ECB will go down this path," he added, noting remarks by ECB policymakers, including President Mario Draghi, still suggesting a wait-and-see approach and putting the onus on politicians to fix the crisis. Schroeder recommends a trade fighting the trend by paying forward Eonia rates below 34 basis points, the recent average.

GAUGING STRESS As Spanish 10-year government bond yields flirt with 6 percent, a level which many analysts say is announcing a new wave in the euro zone crisis, money markets are showing signs of taking less comfort from the ECB's liquidity blanket. A common gauge of interbank tensions, the spread between Libor rates and overnight index swaps, has stabilised in recent sessions at around 30 basis points, after narrowing by two thirds since the ECB's long term liquidity injections. Another measure, the cost of swapping euro rates for dollars via three-month euro/dollar cross currency basis swaps, has also stabilised at around minus 50 basis points, pausing a narrowing trend since last November."I would expect (the two stress indicators) to nudge higher in the next couple of days," FXPro's Smith said. "The momentum we've gained from the ECB's three-year repos is pretty much followed through now."There's still a long way to go in terms of deleveraging and balance sheet adjustment, especially in Spain."The Markit iTraxx index of default insurance for European senior financials, a measure that JPMorgan says is a more useful gauge of interbank stress than money market rates, hit its highest since mid-January on Monday at 256.38 bps.

Money markets ecb gives no rate cut clues, cites interbank progress


* No clues on ECB interest rate cut from monthly policy meet* ECB President Draghi notes positive impact of ECB loans* Secured lending thaws, unsecured mkt still mostly frozenBy William JamesLONDON, Jan 12 The European Central Bank disappointed traders hoping for fresh clues on the path of interest rates on Thursday, but signs were growing that efforts to free up interbank funding markets were beginning to take hold. The central bank kept interest rates steady at its monthly rate-setting meeting and offered little insight into whether it would consider cutting the refinancing rate from its current record low 1 percent. However, ECB President Mario Draghi pointed to signs that its injection of half a trillion euros into the euro zone banking system in December had helped to avoid a credit crunch, highlighting the reopening of unsecured bond markets. Covered bond issuance in Europe has risen in early 2012 with more than a dozen deals lifting optimism the asset class will help banks meet their record 2012 funding needs.

"There's no doubt (the ECB lending) is helping banks secure much needed funding which, if you go back a few weeks, was an issue," said Lloyds Bank strategist Eric Wand. Booming demand for short-term sovereign treasury bills and sinking money market rates supported the view that there has been some improvement since the ECB lent banks 489 billion euros for an unprecedented three years. Italy became the latest sovereign to benefit from the glut of cash sitting with banks, as the ailing sovereign managed to sell short-term debt worth 8.5 billion euros at half the cost it had to pay in mid-December. This renewed appetite for bills issued by previously shunned euro zone states has helped to drive the cost of raising money with those assets sharply lower, affording banks better access to secured sources of funding.

"If you look at secured lending, our traders say repo markets, particularly for Italian collateral and peripheral collateral, have opened up again and are seeing trades going through in size again, up to three-month terms," said Commerzbank strategist Benjamin Schroeder. Data from electronic trading platform MTS showed the overnight rate for using Italian general collateral to raise money through the repo markets had fallen to 30 basis points, having frequently topped 1 percent in December.

NOT FUNCTIONING Despite signs of improvement in some areas, Draghi still described the interbank funding market as "not functioning". Analysts said the market for unsecured funding, where banks traditionally sourced the majority of their financial needs, remains moribund."Some of the unsecured markets are opening up but I think it's still pretty locked for all but the best names," Lloyds' Wand said. "There's a slight thawing but obviously a long way to go before we get banks happy to lend to one another. The three-month Euribor rate, fixed daily based on contributions from a panel of banks, showed banks believed they could obtain funding at 1.245 percent, extending a continuous daily fall that began on Dec. 21The equivalent Libor rate also fell but analysts said that at this stage, there was little real lending available to banks at that duration and cost."Unsecured lending is difficult to judge. The indication we have is Euribor, and that is pretty much a survey rate with little flows going on," Commerzbank's Schroeder said.

Money markets ecb rate cut may not encourage bank lending


* ECB deposit rate cut may spark money market fund outflows* May hurt repo market volumes due to low rates* Higher-yielding non-periphery paper to benefitBy Marius ZahariaLONDON, July 9 The European Central Bank's cut in interest rates to record lows last week may accelerate outflows from euro zone money market funds and may -- contrary to design -- make banks even more reluctant to lend to each other than before. The ECB cut its deposit facility rate, which banks use to park money with the central bank overnight, to zero and its key refinancing rate to 0.75 percent on Thursday, in a bid to push banks to lend more to businesses. In theory, lower interest rates should increase demand for loans in interbank market and boost the banks' appetite to lend to the real economy as a result of easier access to funds. But uncertainty surrounding the euro zone debt crisis is breaking this chain. Most banks are unwilling to lend to each other or to businesses as they fear an intensification of the crisis could create massive damage to the financial sector. And the few banks that were still willing to lend in interbank markets before the ECB move may stop doing so in the future as rates around the zero mark mean returns may not be enough to cover the transaction costs.

The same goes for the money market fund industry, which is not earning enough interest on its cash. JPMorgan Chase & Co, BlackRock Inc, which is the world's largest money manager, and Goldman Sachs Group Inc , have restricted investor access to European money market funds in the wake of the ECB's moves."Euro zone money market funds will likely see further outflows. The move to zero (in the ECB's deposit facility rate) is another blow for the money market fund industry," said Nikolaos Panigirtzoglou, managing director of the global asset allocation and alternative investments at JPMorgan. He said it was almost impossible to estimate the potential damage, but pointed to cumulative outflows of 34 percent in U.S. money market funds since 2008 as an indicative figure.

"From mid-2008, euro zone money market funds shrank from 1.3 to 1 trillion euros. If the experience of U.S. funds is any indication ... then euro zone money funds could see outflows of another 150 billion euros."Bond funds will likely be the main beneficiaries of these outflows, he said, with higher-yielding corporate and sovereign paper outside the euro zone's periphery, such as Belgian and French short-term debt, likely to see the most inflows. Belgian bonds outperformed other euro zone paper on Monday, especially shorter-term debt.

PENALISED FOR LENDING It is still too early to gauge the full impact of the ECB's rate cut, but analysts expect it to hit volumes in the most active sector of the euro zone interbank markets - the repo transactions, in which investors raise cash backed by collateral, usually government debt. The rates to borrow cash using a basket of top-rated German general collateral were in single-digit negative territory across different maturities on Monday, traders said. This means those who are asking for German collateral to lend are being penalised for doing so. Given the low confidence government debt issued by countries which are the forefront of the crisis, such as Italy or Spain, it is likely that they will hold on to cash rather than accept lower-rated collateral."The danger is that liquidity in repo markets will wane," said Benjamin Schroeder, rate strategist at Commerzbank. Some funds are still willing to brave the ever-lower rates environment, however."I'm quite happy to hear that some of our competitors are closing their fund for new investors because we are building up our AUM (assets under management)," said Gerard Moerman, head of rates and money markets at Aegon."Money held with the ECB doesn't return anything anymore so one can decide to put the money into a money market fund ... and ours is open," said Moerman, whose 150 billion money market fund is currently returning 0.85 percent.

Money markets key interbank lending rates ease


* 3-mo Libor rate eases* 3-month euro/dollar cross currency basis swap narrows* U.S. money funds bank more aggressively on EuropeBy Ellen FreilichNEW YORK, March 21 After pricing out some of the expectations for a third round of quantitative monetary easing, some U.S. interest rates eased a bit on Wednesday, but in the interbank lending market, three-month Libor eased after having been flat for several days. The benchmark three-month London Interbank Offered Rate (LIBOR) fixed at 0.72357 percent on Wednesday, down from 0.73214 percent on Tuesday. The three month euro/dollar cross currency basis swap , another gauge of dollar funding risk, narrowed to minus 58 basis points, the tightest in nine months.

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. The relaxation was said to be tied to good economic data, especially from the United States, and optimism among some investors about euro zone sovereign debt. Three-year loans from the European Central Bank (ECB) have also contributed mightily to alleviating worries about counterparty risk. After a week of mainly adding risk, investors tried the reverse tack on Wednesday with global stocks drifting lower and safe-haven government debt prices rising. Last month, however, the latest period for which data was available, figures on taxable money funds showed those funds ready to participate a little more aggressively on Europe.

Money fund holdings of French bank deposits, commercial paper and repo increased by 14 percent, returning to their October level. Since these holdings troughed in December, French bank exposures have increased by 72 percent, but are still half what they were in May 2011, said Barclays Capital market analyst Joseph Abate."After reducing their exposures too far, money funds appear to be looking for a 'happy medium' between the two extremes," he said.

Scandinavian, German, and UK holdings by money market funds were largely unchanged in February. Weighted average maturities of money fund European bank exposures also lengthened in February, consistent with overall market "risk on" sentiment, Abate said. As firms lock in low rates by borrowing for longer periods, the weighted average maturity on commercial paper outstanding has lengthened to 47 days from 39 in September, he said. As interbank lending rates have eased, money fund investors looking for returns benefited from increases in overnight repo rates from January's single-digit basis points to the low teens to mid-20s. The rise in repo rates combined with managers' willingness to extend average maturities has contributed to a marginal rise in money market yields, analysts said."Clearly, investors and businesses are growing more comfortable with the course of events, not just in the United States, but in Europe," Deborah A. Cunningham, chief investment officer for the taxable money markets and senior portfolio manager at Federated Investment Management Company, wrote in an analysis published earlier this month."On an historical basis, the current inflation rate combined with improving economic fundamentals would indicate the federal funds target rate easily could be 1 percent, or even 2 percent, and still be considered very accommodative," she said. "Indeed, in any other environment, a 1 percent target funds rate would seem extremely low. Now, it would seem like nirvana."

Money markets spanish bond shortage distorts repo


* Spanish bond shortage distorts repo market* Italian rates rise but market still functioning* Interbank cash rates fall on rate cut expectationsBy Kirsten DonovanLONDON, June 18 A lack of available Spanish government bonds, due to so many being used to obtain funding at the European Central Bank, is distorting pricing in repo markets and causing investors headaches as they seek to cover hefty short positions. As international investors sold Spanish government bonds this year, domestic banks bought them and parked them at the ECB in return for funds - particularly during the two recent three-year funding operations. As a result, investors who need the bonds because of their own short positions must pay a premium for the paper. When this happens in repo markets - where banks commonly use government bonds as collateral to raise funding - bonds are said to be trading "special". Effectively, the investor who needs the bonds pays a premium to their counterparty in the trade - the opposite of a typical repo trade where the party borrowing cash pays the premium.

"There's some good evidence of a collateral shortage out there," said ICAP rate strategist Chris Clark. "Quite a lot may be being used at the ECB and the market short (positions) out there will be increasing the demand for specific bonds."It is the opposite of what might be expected when a country's debt comes under pressure. Then counterparties are usually more reluctant to be left holding the bonds."The collateral just isn't there. That's one of the problems and the few bonds that are still available are highly sought after by people who want to cover their short positions," said Commerzbank rate strategist Benjamin Schroeder. Ten-year Spanish government bond yields have risen more than 130 basis points since the start of May, while two-year yields are up over 2 percentage points.

That prompted international clearing house LCH. Clearnet SA to increase the cost of using Spanish bonds to raise funds via its repo service last month. Analysts said their trading desks had since seen volumes over the platform drop."It's a further segregation of European money markets, where banks are retreating from central clearing houses and going back to domestic clearing or bilateral agreements," Schroeder said. As the euro zone debt crisis intensified this month, mainly due to worries about Spain's banking sector, Italian general collateral (GC) repo rates, paid to borrow funds against a basket of government bonds, have been pushed higher. There is little trade in the Spanish general collateral market but banks are still able to borrow using Italian bonds as collateral, despite Italy being seen as vulnerable to contagion from worries about Spain.

Three-month Italian GC rates rose to 0.42 percent at the end of last week, compared to the Eonia overnight rate at around 30 basis points, according to ICAP. The Italian rate had traded below Eonia from the time of the ECB's second three-year funding operation at the end of February until the end of May."There's been a rise in Italian general collateral rates, both outright and relative to the Eonia OIS curve," ICAP's Clark said. "Despite a reduction in the amount of term activity that goes on, the Italian market is still very much functional."RATE SPECULATION Three-month Euribor interbank lending rates eased again, hitting their lowest since the second quarter of 2010 as speculation grew the ECB may cut interest rates. ECB president Mario Draghi heightened expectations the bank could cut interest rates or take further policy action soon after saying on Friday that the euro zone economy faced serious risks and no inflation threat. September and December Euribor futures contracts rallied to contract highs, pushing implied rates lower. Markets are pricing in a 50 percent chance of a 12.5 basis point cut in the ECB's 0.25 percent deposit rate this year, and a 25 percent of the rate being cut to zero, according to RBS.

Money markets steady ecb seen, focus shifts to cash repayments


* 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.