Aug 16 Euro zone interbank lending rates have fallen far below their U.S. equivalent on expectations that the European Central Bank will ease monetary policy further, drawing closer to the Federal Reserve's near-zero rate policy. Three-month Euribor rates have hit record lows on a regular basis since the last monetary policy meeting when ECB chief Mario Draghi said the bank's policymakers discussed the possibility of cutting rates at their August meeting but had decided it was not the time. Given U.S. rates are already near zero, further monetary easing in the world's largest economy should come in the form of non-standard measures - probably more "quantitative easing" through central bank bond-buying - explaining the growing difference between euro and dollar interbank rates, analysts said."The divergence between the two ... is mainly due to different monetary policy expectation between the euro zone and the U.S., with markets still pricing the possibility of further policy rate cuts in the euro zone," Giuseppe Maraffino, fixed income strategist at Barclays said."The market is now pricing a high probability of a refi rate cut in the euro zone and also some chance of a deposit facility (rate) in negative territory."Three month euro Libor rates were little changed on Thursday at 21 basis points, half their dollar equivalent at 43 basis points.
The three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased to 0.339 percent from 0.341 percent on Wednesday. The ECB is expected to cut its refinancing rate by another 25 basis points to 0.5 percent in September, according to a Reuters poll of economists. Eonia forwards suggested the market expected overnight rates to fall further from current levels, to a trough of 0.068-0.018 percent in November from 0.11 percent currently.
Given that the deposit rate - currently at zero - serves as a floor for overnight Eonia rates, analysts said this suggested the market was pricing in some possibility of negative deposit rates. ECONOMIC STRESS
While the euro zone economy contracted 0.2 percent in the second quarter and was seen slipping back into recession, recent U.S. data has suggested economic growth might pick up in the second half of the year. Still, the data still pointed to lacklustre growth in the U.S. economy, fueling the view that more Federal Reserve stimulus may be in the offing, although perhaps not as soon as next month. The expectations for ECB action - be it through lower interest rates or some other non-standard measure - was high after strong comments from its president Mario Draghi that the bank would do what was necessary to preserve the euro. Although pledges for bond-purchases would be subject to countries asking euro zone rescue funds for aid first - and therefore highly political - the ECB could also resort to measures such as providing more cheap funding or easing collateral rules further, analysts said. Poll respondents were split on the likelihood of further long-term refinancing operations like those ECB conducted in December and February, essentially hosing the markets down with over one trillion euros of three-year cash."There is a very strong chance of easing, which instrument they use is still open to question," Ciaran O'Hagan, strategist at Societe Generale.
Aug 23 Euro zone implied interest rates may be too low if the European Central Bank buys Spanish and Italian bonds in large numbers to curb borrowing costs. Analysts are expecting further ECB rate cuts to help kick start the economy and encourage banks to lend cash but a concerted effort to lower and stabilise peripheral yields may be more successful in restoring confidence."One of the things the ECB tried to do was entice banks to lend," RBS rate strategist Brian Mangwiro said on Thursday."If the ECB to some extent reduces the downside risk coming from Spain and Italy, you could say the need to move the deposit rate into negative territory goes away."Forward overnight rates, show markets are pricing in a slim chance of a cut in the rate the ECB pays banks to deposit cash overnight -- now zero percent -- while a Reuters poll reflected expectations of a 25 basis point cut in the ECB's main refinancing rate to 0.5 percent in September.
The zero percent deposit rate means banks make no money from leaving cash at the central bank and has provided little incentive for them to lend to one another. A further cut in the rate would actively penalise them for leaving the money there. The ECB has said it might buy Spanish and Italian debt if the countries seek help from the euro zone rescue fund. Speculation this week has focused -- despite attempts by the ECB to quash it -- on whether the central bank will try to keep borrowing costs at a pre-determined level after media reports suggesting such a move was being discussed.
Central bank sources told Reuters on Thursday that while the ECB was considering setting a yield target, it would not make the levels public."(Bond buying) would make rate cuts less likely," said Peter Schaffrik, head of European rate strategy at RBC Capital Markets."(The ECB) have achieved low rates for the triple-A countries already, but the trick really is to bring the higher yielding bonds down. You could potentially still do something by bringing down the refinancing rate but it's not the main thing here."
RBS's Mangwiro said that if the ECB was a guaranteed buyer of Spanish or Italian bonds their market value would rise. As banks in the two countries have been heavy buyers of their own sovereign's debt after a spree earlier this year funded by cheap three-year ECB loans, that could also encourage banks to put their cash to work."The mark-to-market value of the bonds goes up and confidence among banks to lend to each other also improves," he said. Interbank Euribor lending rates have been hitting new lows daily on expectations the ECB will cut interest rates again as soon as next month. Forward overnight rates at 3.5 basis points in December are around 7 bps lower than spot, while Euribor futures increase in price until December, implying lower yields. But that may be pricing in too much if the ECB takes aggressive bond buying action and RBS suggests positioning for a flattening of the Euribor curve.
* U.S. 4-week bills sold in recent tight range* Prospective ECB rate cut pushes Euribor lower* Interbank lending rates ease* Overnight collateral rates holding in upper teensBy Ellen FreilichNEW YORK, Aug 7 The Federal Reserve's near-zero interest-rate policy kept U.S. bill rates low on Tuesday, providing the backdrop for a typical weekly four-week Treasury bill sale. The Treasury sold $40 billion in four-week bills at a high rate of 0.085 percent, awarding 23.55 percent of the bids at the high. The value of bids received outflanked those accepted by a 4.23 ratio.
"This was just another business-as-usual four-week bill auction," said Thomas Simons, vice president and money market economist at Jefferies & Co. "The auction fit the same profile we've seen a lot in these auctions over the last few months where the statistics seem to come in a really narrow range."Elsewhere in the short-term paper market, overnight general collateral repo rates, closing at 10 basis on Monday, opened higher on Tuesday, but were expected to soften again by the end of the day, said Roseanne Briggen, market analyst at IFR, a unit of Thomson Reuters. Two-year and three-year notes traded above general collateral rates while five-year and seven-year notes were a bit lower, she said. "The 10-year and bonds remain special, a function of repo plays" before Treasury's refunding sales of 10-year and 30-year bonds on Wednesday and Thursday, respectively, she said. Overseas, bank-to-bank lending rates inched down and were expected to grind lower after the European Central Bank last week fueled expectations of further interest rate cuts and more non-conventional policy measures.
ECB President Mario Draghi said the bank's policymakers discussed cutting interest rates at their meeting last Thursday but decided the time was not right. Draghi's comments increased expectations the bank could cut its main refinancing rate from its current record low of 0.75 percent, but also tempered expectations of the ECB starting to charge banks for depositing funds with it overnight. Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, eased on Tuesday to 0.370 percent from 0.374 percent.
However, investors' immediate focus after last week's meeting was the prospect of the ECB resuming purchases of Spanish and Italian government bonds, if the countries activated the euro zone's rescue funds, to lower borrowing costs. Since Draghi said on July 26 he would do whatever was necessary to preserve the euro, Italian one-year bill yields have halved to 2.38 percent while their Spanish equivalents have dropped some 150 basis points to 3.17 percent. Draghi pared expectations of a further cut in the deposit rate paid to banks on cash parked at the ECB overnight. The deposit rate has recently tracked 75 basis points below the refinancing rate so another cut would push it into negative territory. The overnight Eonia rate is still seen falling from its current 11 basis points to around 3 basis points by the end of the year, according to forward prices. The ECB hopes the unprecedented move in the deposit rate to zero will boost interbank lending by forcing banks to look for more profitable options, but so far, institutions are mainly leaving the money in their current accounts at the ECB.
* Money market curve shifts higher after ECB rates unchanged* Lack of more-dovish signals pushes some to close positions* LTRO repayments eyed for fresh guidance on liquidity drainBy William JamesLONDON, March 7 Interbank borrowing rates inched higher on Thursday as traders who had positioned for the European Central Bank to signal fresh monetary easing found little support from the bank's monthly news conference. Money market rates rose slightly as those who had wagered that Italy's electoral crisis and worsening economic data could push the central bank to signal rate cuts in the near future, looked to close out their positions.
A small minority of banks had forecast the ECB would cut rates in March, but the central bank said its main charge on borrowing would remain unchanged at 0.75 percent. The subsequent news conference offered little in the way of new signs the ECB was preparing to lowering borrowing rates."It seems the markets have been caught a bit on the wrong foot," said Anders Svendsen, chief analyst at Nordea in Copenhagen. "All in all, Draghi remains dovish but more weakness is needed to make the ECB cut rates."One-year fixed term Eonia rates, which reflect the expected average cost of overnight borrowing over the life of the contract, rose by around 2 basis points to 9.5 bps.
Similarly, forward Eonia rates rose and Euribor futures <0#FEI:> fell - both indications that borrowing costs in the wholesale money markets which underpin lending rates throughout the economy, will be slightly higher than expected. However, the limited scale of the moves shows both that expectations of fresh signals had been modest going into the meeting, and that the central bank had not ruled out a cut in the future.
"The reaction in Eonia is, given how much had built up in previous weeks, still relatively moderate," said Benjamin Schroeder, strategist at Commerzbank. "Draghi left the door open (for a rate cut) here, he certainly didn't close it."Gauging the exact level of rate cut expectations is complicated by the huge weight of excess liquidity in the eurosystem, which pushes short-term borrowing costs artificially lower. This makes it hard to distinguish whether moves in money market rates reflect anticipated changes in the level of liquidity or in the market's expectations on the timing of ECB rate moves. Market participants looking to trade short-term rates will look closely at data due from the ECB on Friday on how much liquidity banks will return to the central bank, in an effort to determine the speed at which cash surpluses will fall. A Reuters poll on Monday showed traders expect repayments worth 8 billion euros, adding to the 225 billion euros repaid since the three-year loans became eligible for return in January.
* Spain's banks may be better placed to help sovereign than Italy's* But funding avenues close as worries mount* Euribor rates may see upward pressure if crisis escalatesBy Kirsten DonovanLONDON, April 16 Worries about Spain's ability to meet budget targets are rattling financial markets but its banks may be better placed to help out their sovereign than their Italian counterparts should the debt crisis escalate again. Spain's government bond yields have risen sharply since Friday after data showed a big jump in Spanish banks' borrowing from the European Central Bank at the second of its three-year cash-providing operation (LTROs) in February. But JPMorgan, which calculates that Spanish and Italian banks together borrowed around 300 billion euros at the ECB's two three-year tenders, says this is not necessarily bad. The bank reckons the roughly 90 billion euros of LTRO funds still available to Spanish banks is enough to absorb Spain's 30 billion euro net debt issuance this year as well as the 15 billion euros of maturing debt held by non-domestic investors and half the bank debt due to mature this year."The conclusion is that Italy is more vulnerable, especially if non-domestic investors or non-bank domestic investors are unwilling to roll over their maturing debt," said Nikolaos Panigirtzoglou, European head of JPMorgan's global asset allocation team.
"Spanish banks have enough LTRO funds to absorb both sovereign and their own funding needs until July or August."Italian banks on the other hand can absorb net government debt issuance of 20 billion euros but the remainder of their LTRO funds would only cover 60 percent of maturing debt held by non-domestic investors and no maturing bank debt."The 'war chest' potentially available for Spanish banks to indulge in the carry trade is higher than our initial estimates," Deutsche Bank analysts said, referring to the practice of using money borrowed at low rates to buy higher-yielding assets."Domestics may therefore still support the market."To what degree they would willingly continue to do that - dealers have said much of the demand at auctions this year has come from domestic buyers - is not clear as rising yields on government bonds means potential losses for banks that are holding them.
Those worries, with sovereigns and banks increasingly entwined, mean many investors are reluctant to lend again. A handful of Spanish and Italian banks regained access to financial markets briefly earlier this year but are finding funding doors slammed shut again, with the fallout spreading to institutions beyond the euro zone's periphery. Not one euro zone bank has managed to issue debt in April, Societe Generale said."The post-LTRO confidence boost and debt issuance flood was focused on the core and Nordic names. It didn't really boost investors' confidence in peripheral names," SG credit strategist Suki Mann said.
"Now it's almost impossible for you to see a peripheral bank come to market this quarter."SPOT THE STRESS In another potential stress point for banks, a further escalation of the sovereign debt crisis could also mean that the decline in three-month Euribor rates seen since December begins to reverse. The spread between the Euribor rate and the equivalent maturity overnight indexed swap (OIS) rate is a measure of perceived counterparty risk, which has widened sharply in times of financial market stress. But with overnight Eonia rates pinned at rock bottom levels because of the excess cash in the banking system, any spread widening typical of that increasing stress would have to be reflected through higher Euribor rates. The three-month Euribor rate - the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - fixed at 0.75 percent on Monday. The rate has fallen from 1.30 percent since the beginning of the year. Commerzbank strategists see the rate at 0.65 percent at the end of both the second and third quarters with the potential for all times lows in between. However, they added that the ECB's stance on providing banks with unlimited cash would be sufficient to contain large spread moves.
(Adds analyst quote, updates market action)By Richard LeongNEW YORK Nov 13 U.S. interest rates futures hit session highs on Friday as traders pared bets on the Federal Reserve tightening monetary policy following weaker-than-expected October data on domestic retail sales and producer prices. Cost for banks to borrow dollars remained elevated with the three-month London interbank offered rate rising its highest level since September 2012. Rates futures implied traders see a 66 percent chance the central bank will raise interest rates from near zero for the first time in nine years at its December 15-16 policy meeting. This was lower than 70 percent at Thursday's close, according to CME Group's FedWatch program. On Friday, the U.S.government said retail sales edged up 0.1 percent last month, falling short of a 0.3 percent increase forecast among analysts polled by Reuters, while producer prices fell 0.4 percent last month, compared with an expected 0.2 percent increase.
While rates futures firmed a tad, borrowing costs for dollars ended higher on the week as banks sought to restrain their wholesale lending as year-end approaches, analysts said. In the $5 trillion repurchase agreement market, interest rates finished at 0.23 percent, up from 0.18 percent on Thursday and 0.15 percent from a year ago, according to ICAP.
In the currency market, the interest rate spread on a three-month swap contract to exchange euro-denominated payments for dollar-pegged payments hovered at its widest level since July 2012. Banks and hedge funds use these products for currency bets, while U.S. companies use them to hedge their non-dollar denominated bonds. The cost premium, measured by the three-month London interbank offered rate on dollars over the three-month rate on euros, was unchanged on the day at minus 45 basis points on Friday, according to ICAP.
Three-month dollar Libor climbed to 0.36360 percent, while its euro counterpart held at a record low of minus 0.09214 percent. Money market reform has likely resulted in higher costs for foreign banks to borrow dollars, as some money funds have pared or shed their holdings of commercial paper, certificates of deposits and other non-Treasury securities, analysts said. This may have led some European banks to rely on cross currency swaps to access dollars, said Andrew Hollenhorst, a Citi interest rates strategist."Foreign banks that source USD