* Three-month sterling Libor falls further after minutes* Euribor rates within whisker of record lows* Cut in ECB deposit rate seen more likely than refi rateBy Ana Nicolaci da CostaLONDON, June 20 Interbank lending rates in sterling and in euros continued to fall on Wednesday on growing expectations of further support from major central banks around the world to counter the fallout from the euro zone's debt troubles. The Bank of England looked to be close to launching a new round of monetary stimulus because of the worsening euro zone crisis, according to minutes of its last policy meeting, which showed officials split 5-4 on the move, with Governor Mervyn King in favour. The minutes helped take three-month sterling Libor to its lowest since September 2011, after the rate tumbled last week when the BoE announced a raft of measures to boost liquidity in the banking system and hinted that more quantitative easing gilt purchases could be on the cards. Three-month Euribor rates were only a whisker away from record lows after recent comments from European Central Bank officials prompted markets to price in the possibility of more rate cuts."Barring a massive rebound in retail sales tomorrow and better PMIs, above all, I think the market is going to be heavily discounting more QE (quantitative easing in the UK) in July," Ma r c Ostwald, strategist at Monument Securities, said.
"For the euro zone, I think really the jury is still out ... The talk that ... reducing the deposit rate to zero is no longer a subject which is a taboo at the ECB, would seem to suggest that a few people will be looking for the ECB to cut rates in July. But what difference that's going to make (I don't know)."ECB policymaker Ewald Nowotny said earlier this month the bank has the ability to cut interest rates if the euro zone economy continues to deteriorate and could even slash the rate that controls money market rates to zero. That along with recent comments from ECB President Mario Draghi that the euro zone economy faces serious risks and no inflation threat has heightened expectations the ECB could cut interest rates or take policy action soon. Reflecting this sentiment, three-month Euribor rates traded at 0.657 percent, unchanged from the previous day's level which was the lowest since April 2010. Euribor rates hit a record low of 0.634 percent in March of that same year.
Three-month sterling Libor edged lower to 0.91775 percent from 0.92150 percent the previous session, after a sharp fall last Friday. DEPOSIT RATE CUT Eonia forwards showed that markets were expecting the Eonia overnight rate to trough at between 0.224 percent and 0.174 from August, suggesting the market was discounting some possibility of a deposit rate cut.
The rate offered by the ECB's deposit facility is 0.25 percent and is seen as a floor for overnight Eonia rates which last traded at 0.33 percent."A deposit facility rate cut is (what the market is) expecting now. If you look at where money markets are trading, it's now expecting Eonia fixings below the 20 basis points level, 15 bps below current Eonia fixings. That would only be possible with the cut of the deposit facility rate," Benjamin Schroeder, rate strategist at Commerzbank, said. It was hard to gauge market expectations for a deposit rate cut because the ECB could opt for a smaller reduction to say 0.125 percent or a bigger cut to zero percent, he said. But the market was pricing in a 40 percent chance of a deposit rate cut to zero percent in July and a 50-60 percent of this happening in August, he added. The reading varied widely between analysts. Simon Peck, rate strategist at RBS, said the market was pricing in a 25 percent chance the ECB would cut its deposit rate to zero in September and only an 8 percent chance of such a move in July. The Federal Reserve on Wednesday may also opt to launch a new round of monetary stimulus.
* Euro/dollar 3-month FX basis widens, but move seen brief* Euro interbank rates hit fresh 16-month lows* Deposits with the ECB spike as expectedBy Marius ZahariaLONDON, March 2 One measure of dollar funding costs rose on Friday after ECB loans in the U.S. currency expired, but a glut of cash in the banking system should ensure a falling trend resumes. The three month euro/dollar cross currency basis swap , which measures the cost of swapping euro interest payments on an underlying asset into dollars, hit its widest in five weeks at minus 82 basis points. This follows Thursday's expiry of the ECB's first allotment of three-month unlimited dollar loans on Dec. 7, when banks took over $50 billion."The three-month dollar tender is rolling off, this is why we're seeing the move (wider) today, not because of any inherent market tensions," said UBS currency strategist Geoffrey Yu, adding that he expected the euro/dollar basis to resume its tightening trend soon.
The basis is often used as an indicator of how hard it is for European banks to borrow dollars. The cost shot up to its widest in two years at minus 167.5 bp in late November, before the ECB's first offer of cheap 3-year funding calmed market nerves about the euro debt crisis. Yu said he "wouldn't be surprised" if some European banks swapped into dollars some of the half a trillion euros they borrowed at the ECB's second three-year tender on Wednesday, but the volumes would be low. The three-month interbank dollar Libor rate fixed an touch lower at 0.47575 percent from 0.47970 on Thursday. Equivalent euro rates also fell to 0.86114 percent from Thursday's 0.87893 percent, the lowest level in 16 months, driven down by lower demand for cash after the ECB's massive injection.
DEPOSITS AT ECB RISE Most of the new money ended up back with the ECB, with overnight deposits rising to 777 billion euros from 475 billion euros in the previous day, when the ECB cash entered the system.
The increase is similar to the net additional liquidity after Wednesday's three-year cash tender, which analysts calculate at around 310 billion euros. A persistently high figure in the deposit facility would indicate that the new money is not filtering through to the real economy, as the ECB hopes. The number is, however, unlikely to offer convincing clues on how much money banks are spending on short-dated euro zone government bonds, which rallied sharply after the ECB's first liquidity tender, easing concerns about Europe's debt crisis."Even if they started selling these bonds now, the cash proceeds would still be in the system ... and will still show up in the deposit facility," said Benjamin Schroeder, rate strategist at Commerzbank."Only if somebody withdraws it from the system would you see the number falling."Lending to businesses in the real economy depends on how confident banks are that they will be able to find money in the market, rather than at the ECB, whose support is only temporary, analysts say. But their incentive to test their market access is lower now, given that the system is awash with cash. For instance, volumes used for the unsecured overnight Eonia rate fixing dropped to 24 billion euros on Thursday, compared to 32 billion euros on Wednesday and 39 billion euros on Tuesday.
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.
* Eonia rate closes in on zero on deposit rate cut bets* Off day's lows as ECB policymakers downplay Draghi comments* One-year Eonia rate seen testing record lowsBy Ana Nicolaci da CostaLONDON, May 3 The average cost of overnight borrowing in euros for a year fell close to zero on Friday and could dip into negative territory after the European Central Bank hinted it was open to deposit rate cuts. Eonia rates fell to their lowest since December 2012 a day after ECB President Mario Draghi said the central bank was "technically ready" and open-minded with regards to a cut in the deposit rate and stood ready to act if needed. They came off those lows as ECB officials downplayed the market reaction to Draghi's comments, but analysts said one-year Eonia rates would likely test record lows hit in December 2012.
ECB Governing Council member Erkki Liikanen said there was nothing different in Thursday's discussion about deposit rates. Fellow policymaker Ewald Nowotny said the possibility of a deposit rate cut was not relevant for now, although he later sought to soften those comments."As long as the market continues to price the possibility of negative deposit rates, as they started to do after yesterday's comments ... I expect Eonia rates in medium-to-long term maturities to remain low," said a fixed-income strategist at a London-based bank who asked not to be named."Last December the market was pricing in negative depo rates. So I would say that markets could move to the same level."
One-year fixed-term Eonia rates, which reflect the expected average cost of overnight borrowing over the life of the contract, fell as far as 0.001 percent - its lowest since mid-December. It came off those lows to 0.04 percent, but analysts said it could well test record lows of -0.037 percent hit on Dec. 7 in the near-term. The Eonia curve was inverted, with one-year rates lower than the Eonia overnight borrowing rate, which last stood at 0.078 percent.
Alessandro Giansanti, senior rate strategist at ING, also said one-year Eonia rates could fall as far as -0.05 percent after the ECB's comments the previous session. He said the ECB was trying to prevent money market rates from rising, as the repayment of ECB crisis loans squeezed excess liquidity in the financial system. Excess liquidity last stood at 313.3 billion euros, not far from 200 billion, the level at which market rates have historically tended to start rising."I am not sure that they will decide to decrease the deposit facility to negative levels, but if the situation will not improve on the macro side, I think they will do more easing," Giansanti said. "We are going towards a period of very subdued Eonia rates."Two-year fixed-term Eonia rates also fell to their lowest since December last year at 0.026 percent earlier but were last at 0.063 percent.
* Concerns about banks vs sovereign relationship rise* Money markets may face a new round of stress* Strategists looking for creative ways to position for it* Long end of the curve and relative plays favouredBy Marius ZahariaLONDON, April 13 Money market players are positioning for a new round of financial stress as concerns over euro zone banks' exposure to Spanish and Italian government debt mount, with the duo witnessing fast-rising borrowing costs again. Data showed on Friday that Spanish banks borrowed a record 316.3 billion euros from the European Central Bank in March as they leant heavily on cheap three-year ECB loans due to a lack of market funding avenues available to them. Italian banks also borrowed a whopping 270.1 billion, earlier data showed. Judging by the rally in Italian and Spanish government debt seen at the start of last year, analysts assume that a lot of the cash taken from the ECB has been placed in debt issued by the two sovereigns. But as concerns rise over Spain's ability to enact fiscal discipline without sending its economy into a deeper recession, the contagion risk has taken centre stage again and Spanish and Italian yields have been rising since mid-March.
This leaves domestic banks exposed to sovereigns whose credit worthiness is weakening in the eyes of many. If banks started selling those bonds to stop losses or to get cash to pay back their own debts, borrowing costs for Italy and Spain would rise even faster towards unsustainable levels. As the euro zone's financial system is strongly intertwined, the impact would be felt throughout the bloc."There is an increased strength of the nexus between banks and the sovereigns," RBS rate strategist Simon Peck said."We're going to see an environment whereby at some points in the future (banks) have to liquidate their sovereign holdings to cover redemption needs. The consequence is that when things do turn around, market moves are exacerbated."
HOW TO PLAY IT With so much liquidity in the banking system already, short-term money market rates are likely to remain stuck around very low levels - and strategists have to be more creative than usual to make profits on bets for more money market stress.
The best way to position for it is at the longer end of the money market curve, which is less influenced by the excess cash lingering around in the banking system, they say. Peck recommends betting on a widening of the spread between long-term forward rate agreements (FRA) and overnight index swaps (OIS), a forward-looking measure of counterparty risk based on derivatives of the interbank Libor and overnight Eonia rates. To focus this trade on the long end of the curve, he specifically recommends a contract targeting a bigger difference between the two-year FRA and OIS rates starting in two years time. The 2y2y forward FRA/OIS last stood at 32 basis points and could widen to 75 bps, Peck said. Societe Generale's head of fixed income strategy Vincent Chaigneau also said short-term rates and other derivative products based on them are likely to remain inert in the near future. But he noted that when stress increases, the FRA/Eonia spreads tend to widen relative to FRA/Sonia, their UK money market equivalent, and recommends paying the three-month FRA/Eonia June 2012 contract while receiving the FRA/Sonia June 2012 . The difference between the two contracts was 14.5 basis points on Friday. SocGen started the recommendation at 15.5 bps with a 0 bps target and a 20 basis points stop-loss level."There's a feeling that there are not going to be liquidity problems in the near term. All the (bonds that banks) bought - if they need liquidity they can sell those bonds. They will take losses as bond prices have declined but that protects their liquidity," Chaigneau said."It is a concern that Spanish and Italian banks have increased sovereign exposure so much ... and the (FRA/OIS) complex cannot be immune to the troubles that we see in the sovereign space again."
Dec 5 Money markets all but gave up expectations of further European Central Bank monetary easing on Thursday after ECB President Mario Draghi gave no hint that action was imminent. Some in the market had expected a signal of easier policy but a rise in short-term money market rates suggested such a step was not seen likely. Draghi said after a policy meeting that inflation would stay well below target for the next two years and that the ECB stood ready to act and to lift the economy if needed. But, while there had been a brief discussion of negative deposit rates, no interest rate cuts had been proposed. He told a news conference the ECB would offer new long-term loans to banks only if it felt confident the money would flow into the economy. He was comfortable with the current level of money market rates, which indicated the bank's promise to keep policy rates low for a prolonged period was working.
"I couldn't see anything (in Draghi's speech) which changes what he said before. I didn't see any nuance. We're stuck," said David Keeble, global head of fixed income strategy at Credit Agricole in New York."This has certainly reduced the probability (of more ECB easing) quite drastically."
Forward euro zone overnight Eonia rates dated for future ECB meetings rose by up to 3 basis points to 0.11-0.13 percent [ECBWATCH}, in line with the spot Eonia rate. When forward rates trade lower than the spot rate it is usually a sign that the market expects more easing. Eonia forwards now suggest markets expect the ECB to hold fire for the foreseeable future.
The one-year, one-year forward Eonia rate, which shows where markets see one-year Eonia rates trading in one-year's time , rose 5 bps to 0.24 percent, a level last seen before the ECB cut its main refinancing rate to 0.25 percent last month. Trade in the instrument has grown this year as it is seen as encompassing the period covered by the ECB's forward guidance on interest rates. The fact that it rose close to the key ECB rate also suggests markets expect the ECB to stay on hold for the next two years."The market expected a bit more, they are a bit disappointed," said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. "But that can change with the (next) Draghi speech or with new data."Sandte said that despite looking comfortable with the status quo, the ECB could still consider options such as lower reserve requirements, looser rules on what collateral can be used or conditional, cheap long-term unlimited loans to banks.