Euribor lending rates hit their lowest level since October 2010 on Thursday and were likely to fall further after the European Central Bank injected another bout of cash into the financial system to restore confidence in the struggling banking sector. Banks snapped up 530 billion euros at the ECB's second offering of cheap three-year funds on Wednesday. The extra liquidity will not solve the underlying debt problems in the euro zone, especially as banks increasingly hoard the cash, but it should stave off a credit crunch. The abundance of cash is expected to push key measures of interbank financial stress towards levels seen before the ECB began buying Italian and Spanish bonds in August 2011 to cap a surge in funding costs as market worries about peripheral euro zone debt escalated. Three-month Euribor rates fell to 0.967 percent from 0.983 percent, hitting the lowest level since October 2010. Simon Smith, chief economist at FxPro, expected the spread between 3-month Euribor and overnight Eonia rates, a measure of counterparty risk, to fall to about 40 basis points by May from around 62 bps currently. The spread was at 35 bps at the beginning of August."It is more likely that we find a floor to that spread in its convergence with those of other major markets, such as the dollar market," Smith added. The U.S. dollar Libor/OIS spread stood at 41 bps.
But Smith also stressed that the euro zone's underlying problems remained."The first round (of LTRO) was all about removing the tail risks of a full-scale credit crunch in Europe and it was successful in doing that and reducing the fears about bank refinancing needs ... I think there is a lot more uncertainty with regards to where this one is headed," he said. Alessandro Giansanti, senior rate strategist at ING, said the improvement in funding conditions resulting from the ECB's second three-year long-term refinancing operation (LTRO) could take the Euribor/OIS spread to 30 to 40 bps over the next month.
That would be the floor, he added, because investors would still require a premium for lending cash for three months as opposed to overnight. The overnight Eonia rate at 0.37 percent could not fall much further given it was already close to the 0.25 percent rate offered by the ECB deposit facility, he said. REAL ECONOMY The ECB's liquidity boost has helped stabilise the banking sector and eased tension in financial markets but has yet to filter through into the real economy.
Indeed, ECB President Mario Draghi urged banks on Sunday to help strengthen economic growth by lending the money they borrow from the central bank at very low rates to euro zone households and businesses. The euro zone's manufacturing sector contracted for the seventh straight month in February, a business survey showed on Thursday. Many fear the austerity measures aimed at reigning in debt levels could choke growth. Meanwhile, the huge cash boost for euro zone banks was a factor behind economists' decision to reverse their forecasts for interest rate cuts this year. The ECB is now expected to keep rates on hold at 1.0 percent until deep into 2013, a Reuters poll of economists showed on Thursday."I think (the ECB is) in the realms of liquidity versus interest rate cuts," a trader said. "If the ECB cuts by 25 bps, will the banks pass it on? Probably not. So why do it?"Euribor futures are pricing in no rate cut in March and a 50 percent chance of a 25 basis point rate cut in June, Giansanti added. That was little changed from market expectations before the LTRO, he said, because that had been widely priced in already.
* Liquidity glut pushes interbank rates lower* Banks park record amounts of cash at ECB* Interbank lending largely frozen due to debt crisisBy Emelia Sithole-MatariseLONDON, Jan 6 Interbank rates hit their lowest in nearly nine months on Friday, weighed down by a glut of liquidity in the euro system but interbank lending remains largely frozen as the euro zone debt crisis batters investor confidence. Italian bank UniCredit did little to foster confidence in the European financial sector after it was forced to deeply discount a planned one-for-one equity rights issue, highlighting the problems banks face raising funds. The European Central Bank pumped almost half a trillion euros in three-year loans into the system last month in an effort to ward off a fresh credit crunch, but most of these funds are making their way back to the bank's overnight deposit facility.
Banks parked a record 455 billion euros in overnight deposits at the ECB, data showed on Friday, reflecting their preference for the safety of the central bank to the higher interest rates they could get from lending to each other. They are currently returning to the ECB around two-thirds of a total 685 billion euros it has lent them, including from last month's unprecedented three-year liquidity operation."Risk aversion continues to dominate ... Actual trading is still very much on a name-specific basis," Kevin Pearce, senior broker at ICAP, said."Trading in the week remains thin on both a reluctance to lend and, with banks so long of liquidity, a lack of general bids."
The hunt for safety is also evident in moves at the short end of core euro zone debt curves, with benchmark German Treasury bill yields falling further into negative territory, indicting investors are willing to pay to hold the paper. The injection of cheap funds from the central bank has, however, helped ease some of the tensions in money markets and is keeping interbank offered rates subdued. London interbank offered rates for three-month euros have fallen around 30 basis points since late October to 1.22857 percent, their lowest since last April. Equivalent Euribor rates are also at their lowest since April.
But while the excess is seen keeping key euro priced money markets rates subdued, analysts say dislocations in the interbank markets are likely to remain elevated for as long as the euro zone sovereign debt crisis remains unresolved."Euribor fixings are dropping but there's little turnover behind those rates so it's not an indication to say things are getting better," said Benjamin Schroeder, a strategist at Commerzbank."We've seen an improvement but the underlying problems have not been solved."Analysts hold little hope that a meeting between German and French leaders on Monday will advance the search for a resolution to a crisis now in its third year. Angela Merkel and Nicolas Sarkozy are instead expected to focus largely on strategy for a European Union summit on Jan. 30.
Aug 2 U.S. Eurodollar futures contracts gained on Thursday after the European Central Bank disappointed some investors by taking no new immediate action to contain the region's debt crisis, increasing demand for safe haven U.S. debt. Eurodollar price gains were tempered, however, by expectations that the central bank is likely to take more forceful action to contain the region's debt crisis when it next meets in September. ECB President Mario Draghi said on Thursday that any intervention to curb Italy and Spain's spiraling debt costs would come at the earliest ion September and said that euro zone governments must act first."The ECB didn't really deliver any formal actions, just some promises," said Mike Lin, director or U.S. funding at TD Securities in New York.
Demand for safe-haven U.S. Treasuries had declined since last Thursday, when Draghi fanned expectations for more dramatic action by saying that the ECB would do "whatever it takes" to support the euro. The lack of action on Thursday boosted demand for U.S. Treasuries and sent longer-dated Eurodollars prices higher.
Gains were limited however, with investors now focused on whether the ECB will launch new bond purchases at next month's meeting."I'm surprised we haven't had more of a reaction," said TD's Lin. "Maybe it's the fact that there does seem like there's a bit of a promise that by next meeting something might happen, and maybe that's what's keeping markets from being too disappointed."
Separately, the New York Federal Reserve said on Thursday that it will begin testing the process for executing reverse repurchase transactions with primary dealers to ensure the system is operationally ready. The tests do not reflect a change in the Fed's monetary policy. The Fed has not conducted a reverse repo since 2008, and since then it has added six primary dealers to its roster and there have been several system changes, the New York Fed said in a release. The regional bank last month unveiled reforms for the $1.8 trillion triparty repo market that will force banks to reduce their reliance on the short-term loans and lessen the risks that they pose to the financial system.
* Bernanke offers no hints of QE3, deferred contracts fall * Nearby rates futures edge up on low-rate pledge * ECB auction, lower Libor also help nearby futures By Richard Leong NEW YORK, Feb 29 Deferred U.S. interest rates futures fell on Wednesday on jitters that borrowing costs could rise sooner than expected after Federal Reserve Chairman Ben Bernanke offered no hints the U.S. central bank is ready to flood more cash into the economy. Some traders had bet the Fed would soon embark on a third round of quantitative easing by buying more mortgage-backed securities in an effort to hold down mortgage rates and help a fragile housing market. Bernanke also gave no clues whether the Fed is considering whether it would extend its "Operation Twist," which will end in June. Without more large-scale asset purchases, some traders worry that the London interbank offered rates and other lending costs would rise and hit bank profits. "If you are not going down the QE3 route, that could put upward pressure on Libor and more pressure on banks," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York. Eurodollar futures, which gauge expectations of dollar Libor, for Dec 2013 delivery and beyond fell anywhere from 0.5 to 8.00 basis points in late afternoon trading. While the longer U.S. rate outlook became less certain, Bernanke assured financial markets that the Fed is committed to its near-zero interest rate policy for a few more years. Bernanke told the U.S. House of Representatives Financial Services Committee that the Fed's guidance on exceptionally low interest rates through at least late 2014 is warranted given its outlook for sluggish growth and tame inflation. Nearby Eurodollar futures for March 2012 to June 2013 delivery traded up 0.5 to 3.0 basis points on the day. The ongoing decline in dollar Libor and perception of a positive loan auction from the European Central Bank also supported nearby Eurodollar futures, analysts said. "There is no fear in the market that near-term rates will spike higher," said Alex Manzara, vice president at TJM Futures in Chicago. Three-month dollar Libor fell on Wednesday to 0.48425 percent, the lowest since mid-November. Libor is a rate benchmark for $350 trillion worth of financial products worldwide. Earlier Wednesday, the ECB awarded 530 billion euros of cheap three-year loans to banks in an effort to ensure ample cash is available to lend and to hold down borrowing costs. A total of 800 banks borrowed money, with demand exceeding the 500 billion euros forecast in a recent Reuters poll and the 489 billion allotted in the first such operation in December.
* ECB bond-buying bets spur demand for peripheral T-bills* Demand for German, other top-rated bills not dropping* German, Dutch, French bill yields to stay around zeroBy Marius ZahariaLONDON, Aug 6 Renewed appetite for Italian and Spanish treasury bills on prospects of the ECB stepping in to buy the two countries' debt is unlikely to divert flows away from safe-haven German and French short-term debt markets. Since European Central Bank President Mario Draghi said on July 26 he would do whatever was necessary to preserve the euro, Italian one-year bill yields have halved to 2.27 percent, while their Spanish equivalents have dropped some 200 basis points to 3.07 percent. Last week, Draghi said the ECB may start buying government debt again if troubled countries activated the euro zone's rescue funds and that any forays would target short-dated paper, further strengthening demand for peripheral T-bills. However, this has not prompted a reversal of safe-haven flows into top-rated, short-dated euro zone debt. Short-term German, Dutch, Finnish and French yields have changed little in the past month, hovering at a few basis points either side of zero, meaning in some cases investors are willing to pay to park their cash with a top-rated country for six months or one year.
France and the Netherlands both sold bills on Monday at negative yields. While the ECB is expected to ease Italian and Spanish access to short-term debt markets, its actions are not seen sufficient to assuage investor concerns about the future of the euro zone."Those investors who are buying German T-bills at negative yields are not the kind of investors that would consider buying Italian and Spanish credit," said Christoph Rieger, rate strategist at Commerzbank."At the end of the day, investors will still be very concerned whether the ECB intervention will actually work. If they will only focus on short-term (debt) it will not solve the funding problems that these countries are facing."
Bond traders say investors buying short-term Italian and Spanish debt are mainly domestic banks or hedge funds -- institutions that have a higher tolerance for the risks associated with such assets. BUYING LOCAL Markets for T-bills, which have a maturity of less than two years, have been increasingly driven by domestic investors in the past year, analysts say.
The dormant state of unsecured interbank lending has boosted banks' demand for short-term debt, which can be used at low cost as collateral in secured lending. The ECB's massive liquidity injections have also helped the bill market. Some banks use bills as collateral to get ECB funds while many lenders are simply parking their ECB cash in the T-bill market until they have to use it to pay back maturing debt. As the cost of using a bill as collateral differs depending on its rating, banks in the euro zone's top-rated countries have preferred to buy domestic bills over higher-yielding peripheral paper. Many risk managers at these banks have placed restrictions on peripheral debt holdings as they try to cut exposure to the bloc's most vulnerable debt markets."We have seen a huge decrease in cross-border lending in the past months. Especially in France, banks are not buying into peripheral markets anymore so they are moving into French T-bills," ING rate strategist Alessandro Giansanti said."Many investors just don't want to invest money in low-rated assets, even if it's T-bills."He said that while demand for Spanish and Italian T-bills was likely to increase in the near-term, the appetite for German and other AAA- or AA-rated debt was likely to remain unchanged. He expected the gap between short-dated Spanish and German debt to fall from roughly 300 bps to 150 or even 100 bps in the next few months, while German yields remain around zero.
* Zero deposit rate forces investors to seek yield elsewhere* T-bills benefit, core yields to converge around Germany* Benefit to Spain, Italy bill market seen strictly limitedBy William JamesLONDON, July 17 Demand for euro zone treasury bills has surged since the ECB cut its deposit rate to zero last week as buyers who focus on short term debt look to secure what little yield remains by moving into longer-term and lower-rated investments. Belgium, whose highest credit rating is AA, on Tuesday became the latest euro zone sovereign to sell short-term debt at a negative yield, issuing three-month bills at a yield of minus 0.16 percent. Triple-A rated France, Germany and the Netherlands have all sold T-bills at negative yields in the past week, as has the euro zone's EFSF temporary rescue fund, which is backed by state guarantees.
Investor appetite for low-risk assets is already at an all-time high with dwindling confidence in the euro zone's ability to haul itself away from the brink of break-up and the global economy struggling to grow. But analysts said last week's European Central Bank cut in the rate it pays on overnight deposits to zero had triggered a new spike in demand. The knock-on effect has seen overnight rates fall, pushing some of the most secure banks to offer a negative yield on certificates of deposit, which are widely used by the most risk-averse asset managers such as central banks and money market funds.
"Banks are now charging for the privilege of placing money with them... which is pushing many investors to seek alternative areas in which to effectively park their money," said Richard McGuire, strategist at Rabobank in London. The resultant boom in demand for yield was causing convergence in rates on treasury bills - debt with a maturity of less than two years - among the region's highest rated issuers. Germany issued six-month bills last week at an average yield of minus 0.034 percent, while on July 16 France sold 23-week bills at a cost of minus 0.005 percent - a difference of around 3 bps. At similar sales a month earlier the gap between the two auction yields was 12.5 bps.
"To me, this is investors saying 'I'm actually getting capital destruction in the safest assets, so I'm going to move out along the credit curve and the term structure a little'," said Thushka Maharaj, a vice president in the Credit Suisse European interest rate strategy team""We are still expecting convergence between French and Netherlands T-bills towards the German yield, in the front end the spread is about 20 basis points so there's still room there."The search for higher yielding assets has also pushed down the cost of short-term borrowing for the likes of Spain and Italy - both on the frontline of the region's debt crisis. Spain on Tuesday sold 12 and 18-month bills at around a percentage point lower cost than last month. However, analysts said the 3.92 percent and 5.07 percent yields were still too high to say markets believed the country's finances were on a sustainable path. Strict rules governing the quality of investments that money market funds can invest in prevent many from straying into peripheral debt, limiting the capacity for further spillover from the ECB cut.