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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.

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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 fed staff seen downplaying reserve rate cut


* N. Y. Fed blog raises issues from negative rates * Fed staff raises possible drawbacks on cutting IOER By Richard Leong NEW YORK, Aug 29 U.S. Federal Reserve researchers this week downplayed the chances that the central bank would reduce the interest it pays banks on their excess reserves in order to stimulate lending. Cutting the interest on excess reserves (IOER) that banks park at the Fed could knock short-term interest rates into negative territory, disrupting money markets and the bank systems, two senior New York Fed staffers argued in a blog on Wednesday. That came two days after a separate blog post from a pair of Fed economists arguing that cutting IOER would not alter lending habits and as such would do little to boost the economy. Analysts say the timing of the two blogs from Fed staffers was coincidental and had no connection with the current thinking of policymakers. A New York Fed spokeswoman declined to comment. Still the issues raised are in step with the concerns some Fed officials expressed at the central bank's last policy meeting, according to the July 31-Aug. 1 meeting minutes. If interest rates go negative as a result of the Fed cutting the IOER to zero, the possible reactions among consumers and banks could be "socially unproductive," New York Fed staffers Kenneth Garbade and Jamie McAndrews said in a blog published Wednesday on the New York Fed's website. Garbade is a senior vice president in the money and payments studies function at the New York Fed's research group and McAndrews a research director at the bank. They added that negative short-term rates might create "new risks that are not fully priced by market participants." Negative interest rates could further squeeze the $2.5 trillion U.S. money market fund industry which has already been struggling with near zero rates, analysts said. If the Fed were to cut IOER, driving money fund share prices below zero so they "break the buck," investors could rapidly withdraw money from these funds, causing market turmoil like that seen after the collapse of Lehman Brothers in September 2008. "These are clear trial balloons," said Howard Simons, a strategist at Bianco Research in Chicago. Cutting the IOER is "not really a good idea." Garbade and McAndrews' blog was the second in three days in which Fed staffers highlighted the drawbacks of cutting the IOER, a move some economists have said could spur lending. On Monday, Gaetano Antinolfi, a Fed senior economist, and Todd Keister of the New York Fed's research and statistics group, said reducing IOER would do little to change the amount of reserves banks leave with the central bank. "The quantity of balances banks hold on deposit at the Fed would be essentially unaffected by a change in the IOER rate," they wrote. Simply reducing what the Fed pays on excess reserves would not encourage all banks to lend businesses or consumers, leaving the overall amount of excess reserves little changed, they said. Jeremy Lawson, a senior economist at BNP Paribas, said the pair of Fed economists was "debunking the myth that IOER is hampering business lending." Traders have been speculating the Fed will embark on more policy stimulus at its Sept. 12-13 meeting with bets Fed Chairman Ben Bernanke would hint at further easing on Friday at a gathering of global central bankers in Jackson Hole, Wyoming. Most of the traders' focus has been on further quantitative easing (QE) in the form of large scale bond purchases. There has also been chatter the Fed might extend its commitment to keep short-term rates near zero. Markets consider cutting the IOER the least likely option for the Fed, although the idea of such a move was revived after the European Central Bank cut a similar rate to zero earlier this summer in a bid to help the region's economy. "I've never thought it is an effective tool like QE," BNP's Lawson said.

Money markets new ecb cash could worsen spanish repo distortions


Aug 13 A fresh injection of long-term ECB loans into the banking system could worsen a shortage of Spanish government bonds in the repo market, further squeezing a source of short-term funds for Spain's banks. Traders said a distortion of prices in the Spanish repo market that followed a 1 trillion euro flood of three-year European Central Bank loans in December and February could be exacerbated if the bank repeated the operation. Spanish government bonds have been in short supply in the repo market, where banks commonly use them as collateral to raise funds, since domestic banks parked them at the ECB in return for cash -- particularly the three-year loans. This prompted investors who need the bonds because of their own short positions to pay a premium for the paper. In a normal repo operation, the party needing the cash would pay the premium but in the distorted Spanish market, it is the other way round."In Spain there're a lot of short positions in the market...and we're seeing the repo levels around -3 or -4 percent," a repo market trader said. A negative number means the borrower is effectively being paid to take the lender's cash."As soon as the repo market gets to be like that, it stops functioning effectively and that has a knock-on effect in the cash market because you can't provide liquidity to clients," the trader said.

ECB President Mario Draghi said earlier this month the ECB would discuss loosening its collateral rules further in September and could repeat other measures such as its long-term cheap loans, known as LTROs."Perversely if another LTRO came in and there was a big take-up by Spanish banks and they put Spanish bonds in, the repo market could get worse," another trader said."This is contributing to the decline of the cash market because you need the repo to oil the wheels in the cash market."Banks can repay the ECB's initial three-year loans after 12 months, but as the three-year-old sovereign debt crisis rumbles on with Spain now on the front line, analysts expected reliance by peripheral banks on the central bank to remain high.

Spanish banks' reliance on ECB loans has increased in recent months as it has for Italian banks. But unlike Spain, the Italian repo market is still functioning normally, supported by the deeper liquidity in the country's debt market.

Uncertainty over how efficient promised ECB intervention in bond markets would be in lowering Spanish and Italian borrowing costs, as well as over final details of a bailout of Spanish banks of up to 100 billion euros agreed with the European Union last month, was also keeping repo investors on edge."On the whole the repo market in Spain has deteriorated much faster with the Spanish markets under pressure. You need the sovereign market to be more liquid," said Elaine Lin, a strategist at Morgan Stanley."Immediate improvement is unlikely for the Spanish sovereign or the banking sector given their close link and the capital injection

Money markets repo rates lower as banks pause for quarter end


Preparations for both the end of the quarter and Japan's fiscal year dominated global money markets on Friday, as quiet trading in the Treasury market and a muted reaction to new developments in Europe kept repo and interbank lending rates mostly steady. Rates on general collateral in the overnight repurchase market were in the teens. But Roseanne Briggen, an analyst at IFR, a unit of Thomson Reuters, said the most recently issued Treasury notes were all trading "special," meaning their collateral rates were lower than the general collateral rate."Quarter-end has created a dearth of securities available in the securities lending market as a variety of accounts are reluctant to lend paper over the turn," she said.

Briggen added that the settlement of $99 billion in new Treasury issuance on Monday after this week's auctions would push general collateral rates higher. The three-month London interbank offered rate, or Libor, held steady on Friday after declining for six consecutive sessions, fixing again at 0.46815 percent, the lowest since November.

The Libor/OIS spread, an indicator of fear in the market, was also unchanged from Thursday at 33 basis points, despite new worries that Spain and the Netherlands might miss their fiscal targets. Euro zone finance ministers announced on Friday they were raising the size of their financial firewall to 700 billion euros.

"That sort of brought the issue of Europe from the back burner to the mid-range of the stove," said Chris Ahrens, interest-rate strategist at UBS Securities in Stamford, Connecticut. Ahrens added, however, that the new worries about Europe had not affected the Libor/OIS spread."Libor OIS continues to narrow," he said. "To the extent that it has maybe stopped narrowing in recent days that's a function of quarter-end."

Money markets rise in long term rates may be close to end


Aug 22 A recent improvement in economic data has pushed long-term euro money market rates away from their record lows, but the rise may hit a wall as they approach levels seen before the ECB cut its main interest rates in July. As short-term interest rates have held steady at ultra-low levels for months, investors and strategists are increasingly looking at derivative products that project money market rates into the future. These products are often referred to as the long end of the money market curve and have seen increased volatility recently, offering more trading opportunities. German and French data showing the euro zone's two largest economies avoided recession in the second quarter, as well as better than expected U.S. retail sales and jobs data have soothed worries about the state of the global economy. Expectations the European Central Bank will take steps to lower Spanish and Italian borrowing costs and calm the debt crisis that has driven much of the euro zone into recession has also driven money market rates higher. But analysts think developed economies will at best recover very slowly, prompting major central banks, including the ECB, to maintain easy monetary policy for a prolonged period. And a lack of detail about the ECB's plans is keeping uncertainty high about their effectiveness.

Financial products projecting the overnight euro zone Eonia rate four years into the future trade at 0.43 percent, compared with a record low of 0.2872 percent hit in late July. Three-year Eonia traded at about 0.24 percent, having risen from a record low of around 0.12 percent in July, when, in a sign of how flat the curve was, spot Eonia was at a similar level. Spot settled at 0.103 percent on Tuesday."If risk appetite is improving and there's a feeling that bad economic data is already priced in then these rates ... will be rising, but how far they can go is limited," said Vincent Chaigneau, head of fixed income strategy at Societe Generale. Long-term Eonia rates now trade just below levels seen before the ECB cut the main refinancing rate to 0.75 percent and the deposit facility rate to zero on July 5.

Max Leung, an interest rate strategist at Bank of America Merrill Lynch Global Research, said this was a sign that the rising trend may be coming to an end. PLAYING BLUES

Leung recommended investors place a bet on a drop in one-year Eonia rates starting in three years, rather than the four-year spot Eonia, due to more attractive levels. He said the rate, also known as 3y1y forward Eonia, or blue Eonias, could drop by 20-25 basis points from current levels of around 0.98 percent in the next two-three weeks. JPMorgan rate strategist Fabio Bassi also has a "bullish bias" on blue Eonias, even though he had no specific trading recommendation on them."There is a lot of event risk on the table in the next few weeks, and a lot of uncertainty about the ECB (intervention) plans," Bassi said. The ECB meets next on Sept. 6. JPMorgan expects the ECB to cut the deposit rate to minus 25 basis points in September or October and Bassi recommended betting on a fall in October-dated forward Eonia rates, now trading at around 5 basis points."The risk/reward is such that if they (the ECB) cut the deposit rate to -25bp, (October Eonia) could fall as low as minus 10. If they don't, then you only lose 4-5 basis points," he said.