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Money markets ecb borrowing rises despite cash glut


LONDON Jan 17 Euro zone banks stepped up weekly borrowing from the European Central Bank on Tuesday, indicating some banks are still keen to build cash buffers in the face of sovereign debt concerns despite a surfeit of liquidity in the system. Banks' demand for short-term loans was widely expected to fall as the ECB is set to relax on Wednesday the cash buffers it requires banks to place with it and after they loaded up on cheaper longer-term funds from the central bank in December. The ECB move, which will halve the reserves ratio to 1 percent, is one of a swathe of support measures the ECB announced last month and one which it calculates will free up around 100 billion euros for banks. The banks borrowed 126.88 billion euros at the weekly tender, about 16 billion euros more than their take-up last week and above the 100 billion euros forecast by a Reuters poll. They also took up nearly 39 billion euros in 28-day funds, slightly less than the 41 billion euros maturing. This will still boost the liquidity surplus in the market - currently estimated at 424 billion euros according to Reuters calculations - by around 14 billion euros, keeping interbank rates subdued. The ECB's offer of cheaper three-year funds, the second of which is due on Feb. 29 after an injection of nearly half a trillion euros in December, was also having the unintended consequence of keeping banks hooked on the central bank funds."The ECB has made it so much more attractive to borrow from the central bank than from the market so the trend of increased reliance on its funds is not going to go away any time soon," said JP Morgan strategist Seamus Mac Gorain.

"In the February LTRO (long-term refinancing operation) banks will likely pre-fund a significant proportion of their maturing liabilities for the rest of the year on the basis that they have to assume they won't be able to fund in the market."Standard & Poor's downgrade of Italy and Spain's credit ratings to closer to non-investment grade also doused some of the optimism that had been growing in the market as it compounded their banks' ability to tap funding markets.

A survey by Fitch Rating also warned that a possible retreat from southern Europe by covered bond investors may prolong the reliance of the region's banks on central bank support."There may be unease after the S&P downgrade and going into this new regime with lower reserve ratios and so people want to play it safe and are returning to the ECB," said Commerzbank strategist Benjamin Schroeder. Both Libor and Euribor - benchmark rates for unsecured lending between banks - fell to new 9-1/2-month lows on Tuesday, maintaining their downward trek since the ECB's injection of three-year funds in December. The three-month Libor fixing fell to 1.15071 percent from 1.15786 percent while the equivalent Euribor rate fixed at 1.213 percent with both seen edging closer to the ECB's refinancing rate of 1 percent in coming weeks. The overnight rate however bucked the trend, nudging up to 0.386 percent, as it typically tends to at the end of the ECB's reserves period.

Money markets ecb payback pushes markets into uncharted water


* ECB to give initial LTRO repayment details on Friday at 1100GMT * Ample excess cash to remain in 2013, stabilising spot rates * Steeper money market curve seen as uncertainty hits forward rates By Emelia Sithole-Matarise and Marc Jones LONDON, Jan 24 Money markets are bracing for volatile trading in coming weeks which could lift short-term rates as banks start paying back the 1 trillion euros of ultra-cheap European Central Bank loans that have kept them afloat over the past year. The ECB will say on Friday how much of 490 million first tranche will be returned immediately by the 523 banks that took part in the first of its twin three-year funding handouts at the end of December 2011. Estimates of the payback total are averaging around 100 billion euros according to the latest Reuters poll, although some analysts believe it could be as high as 300 billion euros. That would roughly halve the amount of so-called "excess liquidity" sloshing around the system and has kept bank-to-bank lending rates pinned at record low levels for almost a year. Historically money market rates, which effectively underpin what banks charge firms and consumers for loans, only tend to move freely once excess cash drops below 200 billion but the lengthy repayment timeline has left them in uncharted water. Speculation about how much could be repaid early jolted money markets last week. Interbank lending rates hit their highest since July a senior ECB member brought them back down by saying he thought the amount would not be enough to have an impact. For banks, the desire to show shareholders, regulators and rating agencies that they are weaning themselves off central bank life support is a tempting reason to return the cash. Germany's Deutsche Bank and Commerzbank, France's BNP Paribas, Societe Generale, Credit Agricole, Spain's Santander, BBVA, Caixabank, Sabadell are all angling to pay back the money, while UK's HSBC, Lloyds, RBS and Barclays and Italy's Intesa Sanpaolo and Unicredit are also said to be thinking about it. But the desire to look good must also be weighed against the fact funding markets remain extremely fragile and for many in the demonised periphery are still far more costly than the ECB. While BNP Paribas may only pay 1.2 percent for a 2-1/2 year loan at the moment, a struggling Spanish or Italian bank has to pay far more, making it near impossible to give up the ECB cash. "The case for not paying back is not really big enough for many core banks," said RBC Capital markets analyst Carlo Mareels. "It is a different story for many periphery banks. Maybe their shareholders would rather they kept the money and did something with it." FRONT LOADED, BACK END IMPACTED As with last week's move, money market pricing is likely to be most pronounced in Eonia forward contracts which lock in an overnight borrowing rate over a longer period. Analysts think a large repayment would see one-year rates , currently at 0.15 basis points, quickly bump back up to the 0.22 percent they hit last Thursday when speculation of a big return was growing. Spot rates are expected to remain at their ultra low levels, however, given the belief there will still be enough cash in the system through 2013 to keep them anchored near the ECB's zero deposit rate which acts as a floor for the market. "The market is working on the assumption that liquidity is going to reduce significantly over time, so forward rates are going to be under pressure because of the uncertainty over how much it will be reduced by in a year or so," a trader said.PERIPHERY PRESSURE Euribor futures , which price in expectations of where the market expects interbank rates to be in future, were also seen kicking higher especially for the 2014/2015 strip. As banks get back the government bonds and other collateral they used to borrow from the ECB, the lending markets for those assets could also be affected. While much of the focus will be on the ability of banks from the euro zone's troubled peripheral countries to repay the funds, the initial repayment may be largely influenced by the northern European banks that dominated the first LTRO. Data on who took the cash is not released by the ECB, but combing national central bank data shows over the two handouts Spanish and Italian banks took the lion's share at around 175 billion and 130 billion euros respectively. And digging even deeper shows French and German banks took a more significant share of the first round at 44 and 30 billion euros - not quite as much as the 55 billion taken by Italian banks but more than Spanish banks' 25 billion. With those bank more able to make repayments, it means Friday's figures may provide more of a big bang than the ones from the second LTRO which will be published on Feb. 22. Once repayments are allowed, banks can pay the ECB back as much or as little as they want every week until the end of January 2015 for the first LTRO, February 2015 for the second.

Money markets ecb rate cut still expected this year


Money markets are still pricing in another ECB interest rate cut this year even though expectations have been scaled back slightly after the bank's chief provided few clues on future monetary policy. The European Central Bank's meeting was dominated by the launch of a new and potentially unlimited bond-buying programme to bring down the borrowing costs of struggling euro zone sovereigns, with official interest rates taking a back seat. The ECB left the refinancing rate steady at 0.75 percent and Mario Draghi said the Governing Council had discussed rates but "the decision was that it was not the right time" to move them. While the euro zone economy would probably contract more than previously expected this year, according to new staff forecasts, the central bank also raised its inflation outlook for 2012/2013, giving markets no clear steer on future rate policy intentions."The Euribor strip has fallen in terms of price which is the market paring back expectations of an additional rate cut," Richard McGuire, rate strategist at Rabobank said."Growth is looking more sluggish but inflation is looking a bit stickier, I think that is potentially informing some of that paring back of interest rate cut expectations."Economists had been split on whether the ECB would cut rates going into the meeting, according to a Reuters poll.

Euribor futures between September and December 2012 contracts were down between 1 to 2.5 basis points compared with a 1 to 1.5 basis point fall before the meeting. Further out on the curve between June and December 2016 contracts, Euribor futures were down between 10.5 and 12 basis points, compared to a fall of 6-9 bps before."On the Euribor side, which is more affected by refinancing rate cuts, I think the market is also undecided. That's why if we look at expiries into 2013 they only moved by 1 to 2 basis points," Max Leung, rate strategist, at Bank of America Merrill Lynch said. He said the long end of the Euribor curve had sold off by more but "that's probably because we have long-ends, like the German 10-year, selling off as well, so it is a general curve steepening."

Ten-year German government bond yields were last up 10 basis points at 1.52 percent and 30-year yields were 12 bps firmer at 2.36 percent. UNCONVENTIONAL MEASURES

Attesting to the growing scope of the ECB's role in trying to resolve the crisis, the focus of the ECB monetary policy meeting was on the details of the bond-buying plan the central bank would conduct to bring down the borrowing costs of struggling sovereigns. The scheme would focus on bonds maturing within three years and was strictly within the ECB's mandate, Draghi said. The plan, which remains conditional on sovereigns seeking formal help, fueled a rally in Spanish sovereign bonds and a sell-off in German Bunds."The fact that the ECB has been quite aggressive on the non-standard policy front, and in so much as it hopes that will draw a line under the crisis, that it also reduces the imperative to provide stimulus through conventional channels i.e interest rates," McGuire added. There was no mention of the deposit rate, which was taken to zero at the last policy meeting, during Draghi's press conference. Overnight Eonia rates are currently around 0.10 percent and some analysts say the fact that Eonia forwards show them falling as far as 0.07-0.02 percent in January is evidence that the market is still pricing in some chance of their being cut into negative territory."The market continues to price in the possibility of another 25 basis point refi rate cut going forward and, to a lesser extent, some possibility of a cut in the deposit rate," a strategist at a bank in London. "But it's also true that this likelihood is lower than it was before the meeting, especially for the expectations on the depo rate."

Money markets market may price out ecb cut after inflation warning


Short-term euro zone interest rates held steady after the ECB's policy meeting on Thursday but could begin to price out the small probability of it cutting rates this year if Greece's debt swap deal proves successful. The European Central Bank said the bloc's gradual economic recovery might take slightly longer than previously thought and added that inflation might also be more stubborn. For a table of new ECB projections, seeEuribor interest rate futures <0#FEI:> and overnight Eonia rate forwards, instruments usually used to gauge market expectations of moves in ECB benchmark rates, were little changed across the 2012-2013 strip after the comments and analysts said no rate move was priced in for the foreseeable future. Markets have not reacted mostly because they were still nervous ahead of a deadline for investors to swap their Greek bonds for new ones later in the day, a vital exchange for Athens to avoid a chaotic default. But most investors saw that scenario as a marginal risk. A senior Greek government official said on Thursday afternoon that over 75 percent of bondholders with eligible Greek debt had signed up for the bond exchange, meaning the deal is likely to go through. Once that is out of the equation, rates such as Eonia forwards may move higher as analysts leaned towards interpreting ECB President's Mario Draghi's tone at his news conference as somewhat hawkish after his comments on the upside risks for inflation."Money markets have to take it on board that the prospect of a rate cut has gone down over the past hour or so," said David Keeble, global head of fixed income strategy at Credit Agricole.

"Also, they will have to do with the cash that they've got, which is ample."He said fixings of benchmark interbank rates such as Euribor and Libor should continue to grind lower, driven by the bank's injection of around a trillion euros in two rounds of ultra-cheap three-year loans. The three-month euro Libor rate fixed at 0.81429 percent versus Wednesday's 0.82400 percent. The rate has dropped by almost half-a-percentage point this year. Also sensing a slight hawkish bias in Draghi's tone, Societe Generale's head of fixed income strategy Vincent Chaigneau said some of the Eonia forward rates across the 2012 strip might be too low.

"He was probably slightly on the hawkish side ... in particular he upgraded the inflation risks," Chaigneau said. "It would take a better outlook on growth for the curve to steepen, but maybe there's a bit of room in the September Eonia.""0.31 percent is slightly on the low side given that in the February MP (maintenance period) it averaged 0.36 percent. There is still a small probability of a cut priced in ... but the focus now is on the Greek (debt restructuring deal)."Banks are required to keep a certain level of cash with the ECB over the course of a roughly one-month maintenance period.

LIQUID AND CAUTIOUS The ECB has flagged its ample cash injections as a success and said things would have been much worse without the extra funds. But traders say interbank lending activity has not picked up markedly and many remain unconvinced that the worst for the euro zone is now behind."The financial system is incredibly stressed ... you've got to stay ultra cautious, ultra-liquid," said Peter Allwright, head of absolute rates and currency at RWC Partners, which has $4 billion under management. He said the front end of the core European yield curve was going to remain bid as investors remained worried about the risks the euro zone still faced and banks wanted top-quality collateral to secure their liquidity needs."Stay long in the front-end core markets," Allwright said. "It's a good, triple-A, high-quality collateral and there's a massive shortage of that ... I can easily see two-year Schatz yielding negative during the next round of stress."He mentioned poor economic data, high oil prices, the Greek and French elections as future potential crunch points that would increase stress in financial markets.

Money markets no shock at ecb status quo, but future cuts eyed


* ECB give no fresh clues on monetary easing prospects* Grim data means trader refuse to rule out rate cut* Lack of Spanish bailout may make December cut less likelyBy William JamesLONDON, Nov 8 The European Central Bank gave money markets no fresh signals that it was ready to lower interest rates in the near future at Thursday's news conference, but traders said prospects for a cut were still alive.

The central bank left rates on hold at 0.75 percent, deferring any change in borrowing costs while it waits for a cue to use its new bond-purchase programme, and stating that inflation is expected to remain above 2 percent throughout 2012. The lack of a strong reaction in financial markets showed the decision broadly confirmed the expectations of traders who borrow and lend money on a short term basis and are heavily influenced by ECB policy. That said, recent grim assessments of the euro zone economy by the European Commission and the admission by ECB President Mario Draghi that unemployment was 'deplorably high' had raised some speculation of a shift in rhetoric towards more cuts.

"Those who were anticipating a change in Draghi's stance at this meeting in the wake of his dovish words, will have been modestly disappointed," said Rabobank strategist Richard McGuire. "Implicitly the door is open but we've got no explicit indication they are set to walk through it."Euribor futures , a measure of interest rate expectations, had rallied by around 4 ticks in the previous session. They only gave up one tick of those gains during the course of the meeting, indicating some disappointment but that heightened expectations of a cut persist.

"The market had showed mounting expectation of further easing from the ECB. Next month will be important for driving the money market. The rally (in expectations) has been quite substantial so there is limited scope for a further rally now," said ING strategist Alessandro Giansanti in Amsterdam. December's meeting will bring an update to its staff forecasts on inflation and growth which could, if they paint an increasingly poor picture of the euro zone, support the argument for more rate cuts. Opposing that view is the ECB's acknowledgement that the 'monetary transmission mechanism', through which lower rates lead to cheaper borrowing throughout the euro zone, is still not functioning effectively. The bank's main tool targeted at improving this mechanism is a bond buying programme aimed at distressed countries like Spain, but this will not come into effect until they ask for and receive a euro zone bailout package -- a prospect that looks unlikely in the near term.

Money markets signs point to banks increasing ecb reliance


* Funding requirements point to increased ECB reliance* Demand seen high at next 3-year financing operation* Signs point to banks gathering collateralBy Kirsten DonovanLONDON, Jan 20 Funding requirements suggest banks will considerably increase their take-up of liquidity from the European Central Bank at the end of February when they have another chance to secure three-year cash. Although some banks have accessed senior bond markets this month - to the tune of 47 billion euros of which around 20 billion euros is senior debt according to Societe Generale - it is a small fraction of the 700 billion euro wall of funding redemptions that the European Banking Association calculates is due this year, mostly in the first half. After an in-depth analysis into take-up at the ECB's first three-year funding operation in December, Morgan Stanley concludes that banks will take a further 150 billion to 400 billion euros of such funds at the end of February, pushing excess liquidity in the banking sector sharply higher from its current level of over 500 billion euros. Spanish and Italian banks have taken between 50 and 150 percent of their 2012 funding needs already, Morgan Stanley calculates, which may explain some of the recent strong demand for shorter-dated Spanish government bonds as the cash is parked until needed for redemptions.

"Those banks which didn't do 100 percent in the first (three-year operation) indicate ...they may do this in February and many may go beyond just 2012," the banks' rate and credit strategists said."This not only materially reduces the risks around funding for these institutions but should in the near term re-assure corporate depositors who have been running down deposits."The spread of unsecured lending rates over overnight index swap rates, which indicate the level of counterparty risk seen in the future, is seen narrowing through 2012.

The so called FRA/OIS spread is around 63 basis points for March, while the December spread is around 43 basis points, according to ICAP data. Reflecting the huge amount of liquidity in the banking system, average current account holdings exceeded the average reserve requirement by as much as 140 billion euros this week, the most since early 2010, according to Reuters data."I think we will again see a high level of demand (at the next three-year tender)," said Simon Smith, Chief Economist at FxPro."Banks see it as the only route at the moment to secure funding and it is the most viable option for providing some policy relief."

Despite the huge amount of longer-term liquidity in the banking system and a halving of reserve requirements, banks actually increased their take-up of one-week ECB funds this week, contrary to expectations. That has pushed the Eonia overnight rate down to just 37 basis points. And there are signs that banks are already readying collateral for February's operation. Analysts have suggested that some of the recent demand at shorter-dated euro zone debt auctions has been banks loading up on eligible assets, while a widening of collateral requirements will see lower-rated asset-backed securities eligible for inclusion, one possible reason that the weekly ECB borrowing rose this week."One factor leading to higher allotments even now could be that some banks are already pulling their collateral together for...the end of February," said Commerzbank rate strategist Benjamin Schroeder."This could for example include the structuring of ABS, where the lowering of the AAA rating threshold to A- has made securitisations from Portugal and Ireland eligible."