Interbank Euribor rates have fallen below their dollar counterparts as money markets expect the European Central Bank to play catch up with the near-zero rate policy of the U.S. Federal Reserve. Money markets are increasingly pricing in the possibility that the ECB will cut refi rates again in the second half of this year and/or reduce the deposit facility rate which would take it to negative territory. While only seven in a Reuters poll expect the central bank will cut the refi rate by 25 basis points for a second month in a row in August, the survey showed a clear majority - 44 out of 69 - expect it will do so before 2013. An interest and deposit rate cut earlier in July, along with expectations of more to come, drove three-year Euribor rates to new record lows this week and below U.S. interbank lending rates last for the first time since 2008 recently. But analysts said the move was more a reflection of rate expectations than any indication that the escalation in the euro zone debt market was seeping through into money markets."In January 2008, it was tensions in the U.S. dollar market that pushed three-month Libor up. This explains why in that period, the dollar Libor was much higher than Euribor," Giuseppe Maraffino, strategist at Barclays said.
"Now the fact Euribor is lower than dollar Libor reflects different monetary policy expectation between Europe and the U.S. (rather than rising tensions in Europe)."Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.427 percent from 0.435 percent. That was below the U.S. dollar Libor rate which last stood at 0.448 percent. Maraffino said the market was pricing in some chance of a rate cut in the fourth quarter of the year, while in the United States the debate is now more about whether or not the Fed would do another round of quantitative easing. Fed Chairman Ben Bernanke last week offered a gloomy view of the economy's prospects, but provided few concrete clues on whether the U.S. central bank was moving closer to a fresh round of monetary stimulus.
"U.S. rates are already close to zero, so the Fed is not expected to cut the Fed fund rates further, whereas in the euro zone, markets are pricing in further monetary policy action by the ECB via a policy rate cut," Maraffino added. The spread between three-month Euribor rates and three-month dollar Libor rates fell below zero for the first time since 2008 on Friday and was last at -2 basis points. Given market expectations for lower interest rates in the euro zone, analysts expected that gap to fall further, as far as -10 to - 15 bps.
"You could argue that the ECB has not been as accommodative as the Fed until now. So if it's a catch-up game, then the gap can be closed but it's going to be closed on the ECB's leg, not on the Fed's leg," Matteo Regesta, strategist at BNP Paribas said. Both the ECB and the Fed will hold monetary policy meetings next week. Markets are hoping for at least some signal of further action as Spanish borrowing costs rose sharply this week in the latest escalation of the euro zone debt crisis. Two rounds of cheap ECB financing has insulated money markets somewhat from volatile debt markets by ensuring banks are awash with cash. But the liquidity has done little to solve their underlying problems and to inspire banks to lend. In a sign of that reluctance, the ECB said 11 percent of banks that took part in its latest quarterly Bank Lending Survey made it harder for companies to borrow in the second quarter, while only 1 percent eased their rules. Separate data showed the ECB saw a jump in demand for its dollar funding as a deepening crisis left an increasing number of banks reliant on central bank support."It tells you that with the escalation of the euro crisis to yet higher levels, pressure for dollar funding is increasing. European institutions are recently finding it more difficult to fund in non-euro denominated assets," Regesta said. "That's clearly a result of risk aversion."
* Euribor rates hit multi-month highs on Fed comments* Euribor futures slump as part of broader sell-off* Rise in money market rates may make ECB more dovish-analystBy Ana Nicolaci da CostaLONDON, June 20 Euribor futures slumped on Thursday after the U.S. Federal Reserve signalled it was ready to reduce bond purchases if its economic forecasts are met, pushing bank-to-bank lending rates to multi-month highs. Fed Chairman Ben Bernanke said on Wednesday the U.S. economy is expanding strongly enough for the monetary authority to begin slowing the pace of its bond-buying stimulus later this year, confirming investor fears that central bank liquidity would not remain abundant in future.
"It's a spill-over effect from the Fed decision, increasing the notion that central banks are slowly pulling back liquidity from markets," Benjamin Schroeder, strategist at Commerzbank said. Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, rose across maturities. The one-month Euribor rate hit its highest since August 2012 at 0.125 percent, up from 0.123 percent the day prior.
The three-month Euribor rate rose to 0.214 percent - its highest level since late March - from 0.212 percent. This rise in money market rates could make things more tricky for officials in the euro zone, where many economies are still struggling with recession and high unemployment rates, analysts said.
"Seeing that rates are on the rise and seeing that they have some tightening through rising money market rates, I think (the ECB) will have to steer against this by perhaps employing more dovish tones," Schroeder added. The European Central Bank left interest rates unchanged earlier this month and said at the time that while it had discussed a raft of other policy options, including negative deposit rates, they would remain "on the shelf" for now. But the ECB has also maintained it is ready to act to aid the euro zone economy if needed, and this will leave markets particularly sensitive to data releases. Business surveys on Thursday showed the euro zone's private sector slump eased more than expected this month. Euribor futures dipped across the 2013-2018 strip, falling by double-digits further out the curve. While the March 2014 contract was 6.5 basis points lower at 99.585, Euribor futures were down by more than 20 basis points from the September 2015 contract onwards."Everything is selling off in this generalized... liquidity risk-off move," Richard McGuire, senior fixed income strategist at Rabobank said.
Interbank dollar funding costs extended their declines on Tuesday, reflecting little demand from European institutions for dollar-based funds as lending activity in the interbank market was also scarce. The European Central Bank's three-year loan operations have replenished bank funds with over 1 trillion euros since December and reduced their need to borrow in the short-term interbank debt market, where traders say there is virtually no lending. The three-month London interbank offered rate, which is based on the level banks report they can borrow, declined on Tuesday to 0.47065 percent from 0.47265 percent on Monday. The rate, which is used as a benchmark for interest rate swaps and other rate products, is down from a high of over 58 basis points at the end of the year, though still much higher than the 25-basis-point level that it had traded at in mid-2011."The European entities have plenty of euros now. It's a question of whether they need any dollars to fund their dollar assets," said Jim Lee, head of short-term rates strategy at RBS Securities in Stamford, Connecticut.
EUROPEAN BANKS CUT DOLLAR OBLIGATIONS U.S. money market funds have been stepping back into the market and are lending to more countries at longer maturities after pulling back dramatically last year, leaving French banks grasping for funds needed to fund their dollar-based businesses.
At the same time, European banks have reduced their dollar obligations, reducing their need for funds in the currency. The premium charged to swap three-month euros into dollars in the currency swap market also fell to 54.5 basis points on Tuesday, the lowest rate since last August, reflecting little need for dollar funds. The rate came under extreme stress late last year as European banks struggled to raise the loans, which was one factor behind coordinated action by central banks to offer banks cheap loans.
The largest risk for European banks is if sentiment changes and banks are unable to refinance maturing loans as they come due in the coming month, said Lee of RBS. One headline risk is that Moody's Investors Service currently has 15 of the largest investment banks under review for a ratings downgrade. The rating agency said it expects to conclude the review in mid-May. Bank-to-bank Euribor rates also fell below 0.80 percent for the first time since July 2010. The pace of decline is seen slowing as it heads toward record lows. With the European Central Bank poised to keep refi rates on hold for a while, analysts increasingly see three-month Euribor rates stabilizing around 63 bps - record lows hit in March of 2010. It fell to 0.79 percent on Tuesday from 0.80 percent in the previous session. At record lows, Euribor rates would still offer roughly a 30 bps premium over the overnight Eonia rate, which stood at 0.35 percent in the previous session. The Eonia rate in turn provides a pick-up over the ECB's deposit facility rate of 0.25 percent.
* Cash dollar funding rates steady to higher* Deferred U.S. interest rates futures rise* Payroll data may reinforce view of no QE3 soonBy Richard LeongNEW YORK, April 5 The short-term U.S. interest rates market sent conflicting signals on Thursday on traders' views on the direction of borrowing costs and Federal Reserve policy in advance of Friday's government payroll report. The increase in the interest rates on repurchase agreements (repos) and federal funds, as well as a drop in nearby interest rates futures on Thursday, suggested some nervousness that stronger-than-expected jobs data would further reduce the urgency for the Fed to embark on a third round of large-scale bond purchase, known as QE3, in a move to stimulate the U.S. economy, analysts and traders said."It's the possibility of no more stimulus," said Todd Colvin, senior vice president of global institution sales at R. J. O'Brien and Associates in Chicago. Ultra short-term dollar funding costs also edged up as Wall Street dealers scrambled to finance the Treasuries debt they bought at last week's auctions before a holiday weekend.
More supply is on the way. The U.S. Treasury Department said on Thursday it will sell $66 billion in longer-dated government debt next week."It's cost more for them to finance them," Colvin said. The U.S. bond market will close early at noon (1600 GMT) on Friday ahead of the Easter holiday. On the other hand, latter fed funds and Eurodollar futures beyond late 2013 rose on some traders betting that the central bank would implement more measures to support U.S. growth, which remains sluggish due to high unemployment and a fragile housing market, traders said.
The grab for these deferred contracts was also due partly to some traders who see more value in them than the nearby contracts since they gave up on the notion that QE3 would happen soon, analysts said."There is not an endless wall of cash at the front end of the curve," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York. The Fed's minutes on its March policy meeting, released on Tuesday, showed most policy-makers were still worried about the economy, but suggested fewer of them wanted the Fed to enact more stimulus soon.
Friday's payrolls data could reinforce that view on the Fed if the payroll data come in stronger than expected. The median forecast on the March U.S. payroll figure is for a 203,000 increase, while the consensus reading on the March jobless rate is 8.3 percent, according to 72 economists recently polled by Reuters. The U.S. Labor Department will release its nonfarm payroll survey at 8:30 a.m. (1230 GMT) on Friday. In repo trading, which is what banks and bond dealers charge each other for overnight loans secured by Treasuries, the overnight rate was last quoted at 0.26 percent mid-market, up from 0.23 percent from late Wednesday. In the fed funds market, whose rates the Fed monitors closely, the cost for banks to borrow excess reserves from each other overnight was last bid at 0.15 percent, unchanged for a second day. In the futures market, fed funds futures for delivery through April 2013 closed unchanged to 0.5 basis point lower, while those for delivery beyond April 2013 finished up 0.5 basis point to 4.0 basis points. Eurodollar futures through June 2013 ended mostly down 1.0 basis point to 1.5 basis points. Those contracts beyond June 2013 closed 0.5 basis point to 9.0 basis points higher.
Jan 18 The recent spike in short-term money market rates came to a halt on Friday after a top European Central Bank policymaker played down the chance of banks repaying a massive chunk of their LTRO cash this month. Banks took more than 1 trillion euros of ultra-cheap, three-year loans from the ECB in two separate offers roughly a year ago as it sought to restore order to Europe's crisis-hit financial system. They are allowed to start returning the cash in weekly installments from Jan. 30. and as banks must inform it of their plans a week in advance, the ECB will publish the first repayment amount on Jan. 25. Expectations of the amount to be paid back has increased recently and could be up to 300 billion euros, analysts say, which would effectively halve the amount of excess liquidity in the system. The heavy oversupply of ECB cash has long depressed the rates banks charge each other on lending markets, but the prospect of a significant repayment and a recent cooling of ECB rate cut hopes has triggered a rise in money market rates. The one-year Eonia rate reached a peak of 0.2150 percent on Thursday, its highest since early July, while benchmark Euribor rates hit their highest since mid-October on Friday as they rose to 0.209 percent.
The rise was cut short, however, by comments from Benoit Coeure, the board member in charge of the ECB's market operations, who played down the impact on short-term rates of the early LTRO repayments."Structurally I don't expect the reimbursement to have a very strong impact on Eonia rates, given the excess liquidity in the euro zone, which remains very high," Coeure told reporters. Just a month ago markets were flirting with the idea the ECB could cut interest rates and start charging banks to park their spare cash with it. But things have turned almost 180 degrees since Mario Draghi's surprise revelation last week that a rate cut was not even discussed this month.
PAYBACK TIME "It is all building towards the LTRO payback and whether there will be a big amount repaid," one euro zone-based money market trader who requested anonymity said about the rise in market rates.
"If it is going to be quite modest and less than 200 billion euros it won't really have much of an impact. But if it starts getting up around 300 billion euros, yes, it probably will have a bit of an impact on Eonia."Analysts at Rabobank said that while both Eonia and Euribor rates would rise if there was a large scale LTRO repayment, Eonia would probably rise more due to the different way the rates price counterparty risk. German two-year bond yields were dragged up in the market's slipstream on Friday, rising to their highest in nearly 10 months before falling back again as the day progressed and following Coeure's comments. Shorter-dated bonds were the main beneficiary of the ECB's 1 trillion euros in loans to euro zone banks in late 2011 and early 2012, the cash and record-low official interest rates eventually turning German two-year yields negative. Even if banks do return much of their LTRO money it may not automatically lead to a sharp drop in the 630 billion euros of excess liquidity currently sloshing round the system."It will be interesting to see whether banks pay back a lot of the LTRO money because they want to make it look like they are weaning themselves off central bank support, but then just borrow it back again at the weekly (refinancing operation)," said a trader.
(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."