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Money markets ecb rate cut bets push back to october


Feb 10 The European Central Bank is not expected to cut interest rates again until October at the earliest, money market prices showed on Friday, as traders exited bets for a move in March after the bank gave no hint of further monetary easing any time soon. ECB President Mario Draghi on Thursday pointed to signs the euro zone economy had stabilised recently while warning of big risks to growth, which analysts took as a signal the bank would keep rates steady at 1 percent for the near term. A Reuters snap survey of 57 economists showed only 14 now think the ECB will cut interest rates by 25 basis points to 0.75 percent next month. By contrast, a regular survey last week showed 41 out of 71 analysts thought the central bank would resume rate cuts before the end of the first quarter. Calculations based on one-week Eonia rates show money markets are pricing in a 12 percent probability the bank will resume lowering its refinancing rate in October."You have rather flattish Eonia curve until October ...(which) shows the market is convinced the ECB will continue to carry out its unconventional measures but will not move on the refi rate or conventional policy," said Matteo Regesta, a strategist at BNP Paribas. Economists at RBC Capital Markets said they were no longer expecting further rate cuts from the ECB, reversing their call before Thursday's ECB meeting for further monetary policy easing in coming months.

The ECB's emphasis on some tentative signs of stabilisation in economic activity was consistent with maintaining an expansionary monetary policy, they said."But the diminishing stresses in financial markets and the banking system will probably do enough to ease monetary and financial conditions to enable the ECB to avoid crossing the 1 percent level," they said in a note.

CASH MANIA Interbank lending rates kept up their downward trend on Friday after Draghi urged banks to make use of the generous long-term liquidity the central bank will offer later this month. The ECB also approved an expansion of the type of collateral it accepts at its liquidity operations, which could see banks snap up three-year funds on offer on Feb. 29 after they took up nearly half a trillion euros of the first loans in December.

With expectations of the uptake for the February round matching or even exceeding December's demand, downward pressure on lending rates in the money market remains intense. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.063 percent, the lowest level since late January last year. Equivalent London offered interbank rates fixed at 0.99157 percent, its lowest in just over a year and down from 0.99943 percent. Signs of money market stress have also been abating, with the trend set to continue barring Greece tipping into a chaotic default after its efforts to secure a second bailout hit another glitch on Thursday. The spread of three-month euro Libor over OIS or anticipated central bank rates, tightened two basis points to 64 bps on Friday, down from over 90 bps hit in early December."As long as the mania about the ECB liquidity continues and with an accident in Greece being averted for now, there is no point in taking the other side and we expect spreads to come in further, both in spot and forward terms," Commerzbank strategist Christoph Rieger said.

Money markets ecb repayments point to more use of emergency funds


* ECB repayments indicate increased emergency funding* Reliance on some national central bank cash growingBy Kirsten DonovanLONDON, May 28 European Central Bank accounts for the last week are set to show banks made further early repayments of cash obtained through longer-term liquidity operations, highlighting the trouble some institutions are having funding themselves. More than 21 billion euros of longer-term refinancing operation (LTRO) cash was repaid last week, including around 9 billion euros of funds from December's three-year funding bonanza. That is on top of an almost 11 billion euro repayment earlier in May. But that fall in the outstanding amount corresponded with a rise in the ECB's balance sheet item that accounts for the Emergency Liquidity Assistance (ELA) funding provided by national central banks. The weekly balance sheet, published on Tuesday for the previous week, is expected to show a similar shift in funds.

Commerzbank rate strategist Benjamin Schroeder suggests this may be linked to credit rating agency Fitch's downgrade of Greek covered bonds to "junk" that made such paper ineligible as collateral at the ECB. Technically, banks are not permitted to repay LTRO funds early. There are exceptions for the December and February three-year funding operations, but even those officially cannot be repaid before one year has passed unless a bank runs out of eligible collateral or loses status as a ECB counterparty."You're getting this Balkanisation, where you're dividing up the risk and apportioning it through the national central banks," said RBS rate strategist Simon Peck.

"At the end of the day banks are getting the liquidity that they need, be it from the ECB or the ELA....but it just depicts the ongoing fragmentation that we have seen for some time now."National Central Banks are able to accept, at their own discretion, lower quality collateral than the ECB, allowing banks to acquire the funds necessary to keep operating. But that is not without its risks should the borrowers be unable to repay the cash.

"The concern is that...if the central bank has to mark this collateral to market (prices) it could be sitting on quite sizeable losses if the recipients of this funding can't repay it," said Rabobank rate strategist Richard McGuire."It gives the lie to the notion that the ELA lending is ringfenced and not a euro system liability...as the euro system would probably have to backstop those losses."The 11 billion euros of LTRO repayments earlier in the month were believed to be linked to the ECB's move to stop providing liquidity to Greek banks left temporarily undercapitalised after the Greek debt swap. The exact amount of funding taking place through regional ELAs is not definitively clear, but the ECB's balance sheet item reflecting it - other claims on euro area credit institutions - has risen by over 150 billion euros since the beginning of April alone, highlighting the increasing reliance on such funding."It becomes more of an issue if the rules regarding what is considered as acceptable collateral were to change," RBS' Peck said."But ELA facilities are emergency facilities, so you would expect by nature of their design that the collateral rules would remain sufficiently soft".

Money markets investors cautious as moodys reviews banks


* Money funds wary on bank debt amid Moody's review * Investors prefer bank debt due in 1 month or less * U.S., Freddie sells bills at higher rates By Richard Leong NEW YORK, Feb 27 U.S. money market investors have sought to reduce their risk in major global banks and securities firms after Moody's said it launched a credit review of the institutions. Borrowing costs for the 17 banks and securities firms could rise if Moody's were to downgrade its ratings because of their creditworthiness due to fragile funding conditions, tougher regulations and other issues. Some investors, in particular regulated U.S. money market funds, would not be allowed to buy debt issued by banks if they were to lose Moody's top-notch "P-1" short-term rating or their long-term debt ratings were lowered, analysts said. "There's some talk about that in the market. That's being monitored," said Jill King, senior portfolio manager at Horizon Cash Management LLC in Chicago, which oversees $2.5 billion. J. P. Morgan estimated 58 percent of all U.S. money market funds are rated by Moody's, with combined assets of $1.4 trillion as of the end of January. The funds under review by Moody's owned about $76 billion worth of debt from 11 institutions, which face a possible downgrade to P-2 from P-1. Those firms include UBS AG, Citibank, Bank of America, Lloyds TSB Bank ; Royal Bank of Scotland plc ; Swedbank AB ; HBOS plc which is part of Lloyds; Danske Bank ; Royal of Scotland NV; Goldman Sachs and Morgan Stanley. "Although $76 billion is not a trifling sum, for each of these issuers facing the possibility of a downgrade to P-2, the amount of funding exposed to potential rating action is less than 1 percent of total liabilities," J. P. Morgan said in a research report published on Monday. The money market industry's assets under management total about $2.6 trillion. Until Moody's completes its ratings review, investors prefer to stick with shorter-dated debt maturing in a month a less from the banks and securities firms. "The maturities of what investors are looking at have shortened a bit," said David Sylvester, head of money markets at Wells Fargo Fund Management in Minneapolis, which oversees about $400 billion in assets. The weighted average maturity on debt securities held among prime money market funds is about 61 days, J. P. Morgan said. In addition to less demand for longer-dated bank paper, J. P. Morgan said the Moody's review could eventually stoke more safe-haven flows into U.S. Treasury and agency bills and limit the decline in interbank lending costs. Three-month dollar-denominated Libor was fixed at 0.48910 percent on Monday, the lowest since mid-November. U.S. BILL RATES CLIMB Despite concerns about bank downgrades and Europe's debt crisis, the bidding for new supply of U.S. Treasury and agency bills came in lower than expected on Monday, analysts said. Some analysts attributed weaker demand for T-bills and agency bills to more supply and higher rates offered in the competing repurchase agreement (repo) market. Investors could earn 0.18 percent on an overnight loan in the repo market on Monday, up from 0.14 percent on Friday and above what they could earn on new three-month and six-month bills offered. On Monday, the U.S. Treasury sold $33 billion of three-month bills at a high rate of 0.115 percent, which was the highest since August 2011. The ratio of the amount of bids submitted for the three-month offering size was 4.24, the lowest in two months. The bid-to-cover ratio of Monday's $31 billion six-month bill auction came in at 4.32, the lowest in about a year. The latest six-month T-bills sold at a high rate of 0.145 percent, the highest since August 2011. Freddie Mac sold a combined $2.50 billion in one-month, three-month and six-month bills at higher interest rates than last week.

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 projected 201516 euro cash rates hit record low


* Markets expect ECB to keep rates low for longer* 2015-2016 Euribor futures rally to record highs* Liquidity levels expected to remain elevatedBy Marius ZahariaLONDON, April 23 Projections of key euro zone bank-to-bank Euribor lending rates for 2015 and 2016 hit record lows on Tuesday, after a downbeat German business survey increased bets that the European Central Bank may cut rates and keep them low for a long time. The survey showed Germany's private sector shrank for the first time in five months in April, suggesting Europe's largest economy may contract again this year and strengthening the case for more European Central Bank rate cuts.

Comments from ECB policymakers on Monday stressing falling inflation and poor growth prospects were also taken as a hint that the central bank might cut its key refinancing rate by 25 basis points to a new record low of 0.5 percent in May or June. The ECB left rates on hold at its April policy meeting, but ECB President Mario Draghi said the bank would monitor very closely all data and stand ready to act to boost the recession-hit euro zone. The June 2015 Euribor future hit a record high of 99.58, indicating that the market expects the benchmark three-month Euribor rate to settle at 0.42 percent in June 2015 - the lowest ever projection for that time period.

Longer-term Euribor futures across the 2016 and 2017 strips also hit record highs, although volumes thinned out towards the long end of the curve. The Dec. 2016 contract rose by as much as 5.5 ticks to 99.12, indicating interest rates of 0.88 percent."Negative news on the macro side drives a flattening of the curve," ING rate strategist Alessandro Giansanti said, adding that longer-term Euribor contracts could continue to rally.

The projected rates for 2015 and 2016 were higher than Tuesday's settlement of 0.207 percent for three-month Euribor rates. But this was perhaps not high enough to price in a complete repayment of the three-year crisis loans (LTROs) banks took from the ECB in late 2011 and early 2012, analysts said. They said money market rates pointed to expectations that the ECB would offer more unlimited loans to the weakest banks in the euro zone, keeping the excess liquidity in the banking sector at levels high enough to keep money market rates subdued."It's difficult to see how the peripheral banks will come off ECB support," said Anders Svendsen, chief analyst at Nordea. "The market takes the view that once the LTROs have expired these banks will still have to be supported by the ECB and there will be sufficient liquidity in the system."ING's Giansanti said the low level of long-term rates suggested markets saw a chance that the ECB might come up with new unconventional monetary policy easing measures along the way."These could be another round of LTROs for peripheral banks, maybe starting quantitative easing (printing new money via asset purchases) ... or moving the deposit facility rate into negative territory to encourage banks to lend," he said, adding that none of these were fully priced in.

Money markets spain banks buy govt bonds while cheap fund effect lasts


* S&P cuts 11 Spanish banks, threatens 5 more* Italian banks also snap up government bondsBy Kirsten DonovanLONDON, April 30 Spanish banks continued to load up on government bonds in March, ECB data showed on Monday, tying them ever closer to their indebted sovereign and raising questions over who will support the government when cheap central bank funding is exhausted. The value of Spanish banks' holdings of sovereign bonds rose almost 18 billion euros in March to over 260 billion euros. That is up around 85 billion euros in total since the end of November as institutions invested cheap funds from the European Central Bank's two three-year liquidity operations (LTROs). Much of the rise is widely believed to be domestic banks buying their own country's sovereign bonds, with some of the increase accounted for by changes in market value of the paper."What happens when the firepower of the LTROs is exhausted?" said Nikolaos Panigirtzoglou, European head of JPMorgan's global asset allocation team - adding that that moment would likely come around the middle of the year."Who is going to step in? Are banks going to be willing to borrow at the three-month financing operations to support their sovereign or is someone else going to have to do it?"

Spanish government bonds have sold off sharply in April on growing concerns about the country's ability to meet fiscal targets and its leveraged banking sector. So if Spanish banks continued to be net buyers of the paper in April, then it would indicate that selling by international investors was picking up pace."The domestic banks stepped in to bridge the gap which was left by a fairly sizeable exodus of non-residential bondholders, which is why the LTRO magic has worn off so quickly," said Rabobank rate strategist Richard McGuire. Spain sank into recession in the first quarter, data showed on Monday. With concerns about the banking sector mounting, credit rating agency Standard & Poor's downgraded 11 Spanish banks and warned a further 5 that their ratings could also be cut.

The move came after S&P cut Spain two notches to BBB-plus last week. And on Friday a government source said banks, rather than the government, would assume the cost of any unprovisioned losses on real estate assets after they are moved into a special holding company."We're still focusing on early cycle losses such as the real estate loans which come to light quite quickly in a downturn," McGuire said."But there's later cycle losses that we've yet to dive into such as corporate loans as the country returns to recession."

Italian banks' were also keen buyers of government bonds in March, with holdings up around 22 billion euros and up around 75 billion euros since the end of November."Our sense is there is more capacity and willingness in the Italian banking system to support their sovereign than in Spain," JPMorgan's Panigirtzoglou said."The two largest Spanish banks are clearly not that willing to keep buying sovereign debt and also the capacity of the banking sector in Italy is bigger. Spain's largest bank, Santander, said in its first-quarter results that borrowing from the ECB's three-year financing operations had mostly gone back on deposit with the central bank. Panigirtzoglou calculates that Santander and BBVA have bought just a net 5 billion euros of Spanish bonds in the first quarter."Spanish banks' government bond buying has been overwhelmingly tilted towards smaller banks. That seems likely to continue....(with Santander and BBVA) having characterised their LTRO borrowing as liquidity insurance," he said. Despite banks being flush with ECB cash, loans to euro zone households and firms grew more slowly than expected in March, as banks continued to reduce lending to businesses. However, the vast amount of liquidity in the banking sector drove interbank lending rates to 23-month lows on Monday.