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Money markets draghi threats fail to drag down market rates


Money markets shrugged off the European Central Bank's latest efforts on Thursday to halt the rise in bank-to-bank borrowing costs, despite sharpened rhetoric and another threat to cut interest rates if needed. Money market rates - the starting point for how much banks charge consumers and firms for loans - have been edging up over recent months as the impact of the rise in global bond yields has been complemented by a steady return of ECB crisis loans. The move is effectively an uncontrolled tightening of euro zone monetary policy and ECB President Mario Draghi came out battling to halt the recent upward trend, after the bank held its main interest rate at 0.5 percent again."We will remain particularly attentive to the implications that these developments may have for the stance of monetary policy," Draghi said."If interest rates developed or money market developments were unwarranted in view of our assessment of medium-term price stability... we stand ready to act."He went on to repeat the threat the ECB could cut rates if things continued but markets appeared unconvinced, with both shorter and medium term rates bouncing back to where they started the news conference after an early dip.

But spot Eonia rates from 1-week to 1-year and euribor futures were all roughly were they were before Draghi spoke once the dust had settled. One-year one-year Eonia rates, which reflect where one-year Eonia contracts are expected to be in one year's time, were last at 0.56 percent, over 20 basis points higher than where they were in July when the ECB introduced its forward guidance plans."Eonia (1-year) sold off a bit when he mentioned lower rates but then it bounced back. If he had said that a couple of months ago it would have rocketed the other way," said one London-based money market trader.

"I think a lot of people have come back from holiday and are dying to doing something and put some risk on so, I do think it will continue unless we get some bad data or maybe what's going on in Syria changes things."STEEP ENOUGH?

With the euro zone economy finally showing signs of improvement, Draghi's options to counter the market move in rates are limited to verbal warnings, analysts say. But some experts also point out that with excess liquidity in the euro zone's banking system at around 240 billion euros , still well above where it normally would start to impact rates, there could be a period of consolidation ahead. Draghi himself stressed on Thursday that in the current climate the sensitive level for excess liquidity may be closer to 100 billion euros than the 200 billion some have used as a reference in the past."The uptick in the longer end of the curve are levels that are still acceptable but I would rather be a seller than a buyer at the moment," said a second, euro zone-based trader."Maybe if excess liquidity got to around 100 billion the short dates would move a little but at the moment I don't expect the curve to steepen much, it is priced in enough."

Money markets euro markets stable with no sign of rate cut


* ECB keeps rates on hold, no discussion of easing* Analysts still expect one more cut* Markets not fully pricing low rates for a long timeBy Kirsten DonovanLONDON, Oct 4 Euro zone money markets were stable on Thursday after the European Central Bank kept interest rates on hold, giving no clue when, or if, it may ease them further, although many analysts still expect such a move. The ECB held its main refinancing rate at 0.75 percent and left the rate it pays banks to deposit cash over night - a key factor in calculating the rates at which cash is lent to the wider economy - at zero percent as expected. However, President Mario Draghi said rate cuts had not been discussed at all this month."It's looking less likely we'll get a cut next month," said Credit Agricole's global head of interest rate strategy David Keeble."We're not ruling out a cut, we expect it to come at some point, but they're dragging their feet."

The ECB can cut either the deposit rate or the refinancing rate or both. It has typically maintained a fixed corridor between the two rates but in order to continue this, any further refi rate cut would have to be accompanied by an unprecedented fall in the deposit rate to negative territory. Market pricing based on forward overnight swap rates and presuming a constant relationship between these and the deposit rate shows that the expectation of a cut in the deposit rate this year remains minimal."The deposit rate remains the underlying driver for short-term interest rates and the macro economic impact of changing the refi rate alone is not obvious," said RBS rate strategist Simon Peck. However, economists polled by Reuters last week expect the ECB to cut the refinancing rate to 0.5 percent in the fourth quarter of the year, then remain on hold through 2013.

"Looking at the global backdrop there still remains the justification at some point on the horizon for a rate cut," RBS' Peck said. "With the focus currently on the OMT programme this may turn into a story for early 2013," he added, referring to the ECB's Outright Monetary Transaction bond-buying programme. The Eonia overnight rate is currently at 8.5 basis points . It is seen at 7 basis points in December and only marginally lower through the first half of next year. If a deposit rate cut to minus 25 basis points were being priced in, forward Eonia would likely fall further. And without further changes to the ECB's remuneration system, having a negative deposit rate may not encourage banks to lend more: banks could continue to leave excess cash in their current accounts at the central bank - which pays no interest - rather than lend it to each other or the wider economy. An ECB survey released last week showed that conditions worsened in euro zone money markets in the second quarter of 2012 with liquidity and lending falling, while lending to the firms and households remains moribund .

LOWER FOR LONGER What markets may not be pricing in fully however, is for how long rates may stay at very low levels. Deutsche Bank notes that the front end of the euro yield curve is steeper than both its sterling and dollar counterparts, implying a "faster normalisation period". For example, Eurodollar futures show an implied rate at the end of 2014 around 20 basis points higher than currently, while the Euribor equivalent shows implied rates around 35 basis points higher. The bank recommends buying December 2014 Euribor contracts and selling equivalent maturity Eurodollar contracts to take advantage of any flattening in the Euribor curve as lower rates for longer are priced in. Similarly, RBS recommends betting that the one-year Eonia rate in one year's time will fall. That rate is currently at 18 basis points and the bank has a target of 8 basis points.

Money markets fed qe purchases could lower repo rates barclays


NEW YORK, Aug 24 U.S. Treasury bill rates and overnight general collateral repo rates could dip if the Federal Reserve embarks on another round of quantitative easing and expands its balance sheet through asset purchases, according to a strategist at Barclays Capital. Expectations the Fed will eventually undertake a third round of quantitative easing, known as QE3, have risen since the release this week of minutes from the Fed's last policy meeting. The minutes showed the central bank was likely to deliver another round of monetary stimulus fairly soon unless the economy improved significantly. Any program of outright purchases of Treasuries or mortgage-backed securities would likely pull very short-term interest rates lower, said Joseph Abate, money market strategist at Barclays in New York. "If the Fed decides to do unsterilized QE -- say, on the order of $400 billion or more -- the expansion in the level of bank reserves should push the effective fed funds rate to less than 10 basis points from 13 basis points currently, although the exact magnitude is hard to estimate," Abate said. "Likewise, with overnight unsecured rates moving lower, repo rates should also decline, pulling bill rates lower as well," he said. If however, the Fed were to "sterilize" such purchases by draining excess reserves with repurchases and term deposits, that could push very short-term debt rates higher, Abate said. "Although the Fed has not indicated, we suspect that it would not do reverse repo in order to offset the increase in bank reserves because these have long been associated with a tightening in policy and might be tricky to explain," Abate said. "Sterilization -- via Operation Twist -- has caused short rates and repo rates, in particular, to back up sharply since last December." Under the Fed's current stimulus plan, which has been nicknamed "Operation Twist," the central bank is selling shorter-dated Treasuries and buying longer-dated government debt in an effort to lower long-term interest rates like those on mortgages. The rate on repos secured by Treasuries on Friday stood at 27 basis points, up from 24 basis points on Thursday, according to Reuters data. Repo rates have generally been trending higher since touching a recent low of 0.03 percent over a year ago. Meanwhile, in Europe, bank-to-bank lending rates fell to new all-time lows on Friday as weak economic surveys bolstered expectations the European Central Bank will cut interest rates as soon as next month to help combat the euro zone crisis. The fall in Euribor rates extended a fall in interbank rates that began late last year when the ECB flooded money markets with cheap longer-term loans. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased to 0.295 percent from 0.303 percent on Thursday. Six-month Euribor rates also fell, to 0.564 percent from 0.572 percent. Shorter-term one-week rates were steady at 0.092 percent, while Eonia overnight rates edged up to 0.108 from 0.103 percent. Dollar-priced three-month bank-to-bank Euribor lending rates fell to 0.752 percent from 0.755 percent, while overnight dollar rates eased to 0.312 percent from 0.315 percent.

Money markets safe haven t bill flows immune to periphery rally


* 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.

Money markets shorter term funding measures rise on greece


NEW YORK, May 15 Some shorter-term funding markets are reflecting rising strain in bank borrowing rates as concerns of a Greek exit from the euro increase, although funding costs remain below levels reached late last year. Europe's debt crisis has flared up on risks Greece could exit the euro zone. At the same time, Moody's Investors Service is conducting credit rating reviews expected to lead to widespread downgrades of regional and global banks. That is expected to increase some funding costs and send some subordinated bank bonds in Europe into junk territory. "There has been heightened risk in slightly longer term funding," said Ira Jersey, an interest rate strategist at Credit Suisse in New York. He noted that concerns are reflected "on a forward basis, not really now." Two-year interest rate swap spreads, a proxy for bank counterparty risk, reached their widest since January 10 on Tuesday, widening three quarters of a basis point to 38.25 basis points. The spreads have widened from 27.75 basis points at the beginning of May. The Libor-OIS spread, or FRA/OIS spread, for contracts that mature in early 2013 also rose to 50.2 basis points, up from 49.3 basis points on Monday and an increase from 41.6 basis points a week ago. This spread is seen as a gauge of banks' reluctance to lend. Other short-term funding indicators were relatively stable as central bank loan operations continue to support banks for the near term. The European Central Bank has loaned over 1 trillion euros in three-year loans to banks as part of its Long Term Refinancing Operation (LTRO). The liquidity injection has eased much of the funding concerns that hurt banks late last year. "Banks in Europe still have a ton of cash held over from the LTRO so it's not like there are a lot of funding needs, so therefore the risk of a near term default," said Jersey. The three-month London interbank offered rate was unchanged on Tuesday at 0.46585 percent, down from 0.46685 percent late last week.

Money markets spanish downgrade not seen hitting us debt market, yet


(Adds strategist's quotes, releads story) * S&P cuts 11 Spanish banks, threatens five more * Further Spanish sovereign cuts seen hitting markets By Chris Reese and Kirsten Donovan NEW YORK/LONDON, April 30 The Standard & Poor's credit downgrade of Spain last week should have little immediate impact on U.S. money markets, although further downgrades co uld pressure investors to sell Spanish debt, a J. P. Morgan Securities strategist said on Monday. Following its downgrade of Spain's rating by two notches last week, ratings agency S&P on Monday downgraded 11 Spanish banks and warned a further five that their ratings could also be cut. The downgrade of Spain's sovereign debt was expected to have no direct impact on U.S. funding markets as "the large Spanish banks have been inactive in the U.S. money markets for nearly a year," said Alexander Roever, short-term fixed income strategist at J. P. Morgan Securities in New York. Roever cautioned, however, that any further downgrades could damage Spain's ability to sell debt and impact markets globally. "Any more downgrades that would lead Spain to fall into the sub-investment grade category would have large implications for the markets as it will re sult in Spain being excluded from some bond indices and thereby force passive asset managers to sell," R oever said. Spanish banks continued to load up on government bonds in March, data from the European Central Bank data showed on Monday, tying the banks 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, the long-term refinancing operations known as 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. 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. If Spanish banks continued to be net buyers of the paper in April, 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 Richard McGuire, senior fixed income strategist at Rabobank in London. Spain sank into recession in the first quarter, data showed on Monday. 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." Still, with Spain and other European countries like Italy and Greece on shaky financial ground, the situation remained precarious for Europe as a whole. "Even though the LTROs have helped to stabilize Europe's banks and the global interbank markets, they did not fix the underlying fiscal and political issues," Roever said. "By swapping cash for collateral, the ECB fed the global liquidity glut that has too much cash chasing too few assets," he added. "If peripheral sovereign markets continue to deteriorate and political solutions are not reached, palliative central bank responses like further bond purchases or another LTRO eventually could be forthcoming, further feeding the liquidity glut."