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Money markets early ltro payback poses no threat to low rates

* ECB loan repayment to add little upward pressure to Eonia* Cash surplus high enough to dull impact of any paybacks* Repayments may signal strength, drive lending rates lowerBy William JamesLONDON, April 3 Euro zone money market rates are likely to stay pinned at rock-bottom levels for years by the weight of cheap ECB cash in the system, even if banks choose to repay the central bank loans early. The European Central Bank pumped a trillion euros of three-year loans into euro zone financial institutions in two Long-Term Refinancing Operations (LTRO) in response to growing fears that banks would struggle to refinance their debt against the backdrop of the sovereign crisis. In addition to driving Italian and Spanish bond yields lower, as banks used the funds to buy sovereign debt, the huge surplus of cash has flooded money markets, cutting overnight Eonia rates in half and the benchmark Euribor lending cost to a 21-month low.

Against this more positive backdrop some banks have been able to raise long-term funds in the capital market to pay down their debt, and could opt to show strength by repaying the ECB cash early and funding themselves through the open market."We estimate around 110 billion was borrowed for refinancing. If the capital markets are open for banks they might not replace their maturing bonds with ECB borrowing and that money will be eventually returned," said Nikolaos Panigirtzoglou, strategist at JPMorgan in London. But, given the enormous 777 billion euro excess of cash in the system, even if some banks choose to repay the loans at the first available opportunity early next year, rates are likely to remain at or below their current artificially suppressed levels."Even if perhaps 100 billion is being repaid I don't think that is going to have a major impact on the short end of the curve," said Elwin de Groot, market economist at Rabobank.

"There's so much excess liquidity Eonia rates will stay close to where they are almost whatever happens."Eonia fixed at 0.347 percent on Monday, and one-year equivalent rates were less than 2 bps higher, indicating few in the market expected a liquidity withdrawal substantial enough to squeeze money supply and push rates up. JPMorgan's Panigirtzoglou said that even a repayment of 300 billion euros would probably only lift the Eonia fixing by 5 to 10 basis points.

Longer-term interbank rates could actually fall further if banks choose to repay early, signalling a sooner-than-anticipated revival in confidence, analysts said."If this is viewed as a positive signal, it means that confidence is returning and banks will look to increase the maturities (of lending) in the interbank market - and that will lead to a fall in risk premiums," Rabobank's de Groot said."To some extent that is exactly what the LTRO was aiming for."However, with the risks of a flare-up in the euro zone crisis far from extinguished, analysts said it was too soon for banks to commit to early repayment, as they may need to invest the cash in sovereign bonds to keep their governments afloat."There is still a lot of buying to be done by Spanish and Italian banks if they are willing to support their sovereign. A lot can happen between now and next February - they might need to buy even more than we currently think," Panigirtzoglou said.

Money markets funding options wane as debt crisis intensifies

* Funding doors quietly close as debt crisis ramps up* Short and longer-term funding dwindling* But ECB liquidity should tide banks overBy Kirsten DonovanLONDON, April 11 The latest escalation of the euro zone debt crisis, with Spain now taking centre stage, is closing funding markets for banks again on concerns over exposure to the large amount of sovereign debt now being hoarded by some institutions. Spanish and Italian bond yields have risen sharply over the last week as the effects of the European Central Bank's three-year liquidity operation wear off and worries about Spain's ability to meet its budget targets and fund itself grow. That means banks that used the ECB's cash to buy bonds issued by their own governments may be looking at losses if they need to sell that paper to repay debt."If you parked the ECB cash in government bonds then you're losing money if you need to sell them to repay your own bondholders," said Rabobank rate strategist Lyn Graham-Taylor.

"That has to worry banks. Effectively sovereigns and banks in Spain and Italy have become ever more closely tied together through the (ECB's three-year tenders)."Spanish banks' holdings of government bonds rose by almost 70 billion euros from the end of November to the end of February, while Italian banks' holdings have risen almost 55 billion euros, according to ECB data. Fears over individual bank exposure to the euro zone debt crisis was behind a shut-down in funding markets in the second half of last year, and traders said the pick-up in unsecured interbank lending that had been seen since January had partially reversed. Lenders were again becoming pickier who they give cash to, they added. Doors to longer-term funding markets have also quietly closed again, not only to banks in Spain and Italy but also to some corporate issuers in the two countries.

"We shouldn't put the weakness at the door of illiquidity or the Easter break, but more at Spain's door," said Societe Generale credit analyst Suki Mann."The speed at which the market has unwound, propagated by higher peripheral bond yields, is illustrative of how important it is that we contain Spain. To this end, decisive action somewhere needs to be taken."On Tuesday, Bank of Spain Governor Miguel Angel Fernandez Ordonez said Spanish banks, already hurting from a property crash, could need more capital if the economy continues to deteriorate and they face a new wave of loan defaults. Reflecting those concerns, the cost of insuring against a default by Spanish bank Santander - seen as one of the country's strongest - has risen around 25 basis points in April, according to 5-year credit default swap prices from Markit . For BBVA it is around 70 basis points higher.

Another risk as sovereign bond yields rise is that margins in the repurchase (repo) market, where banks use government bonds as collateral to access cash, may rise, making it a less effective way of funding. Clearing House LCH. Clearnet cut its margin rate on Spanish bonds just three weeks ago, citing the fall in the yields seen since the beginning of the year, but it has not adjusted Italian margins since raising them in January."(A margin rise) would undeniably have an impact but probably but less so than similar hikes have done in the past," said ICAP strategist Chris Clark."The market will be more prepared for it this time around and also there seems to be less active positioning in repo markets these days."Also, banks holding Spanish and Italian government bonds aren't as reliant on the repo market for funding since the ECB's massive three-year liquidity injections, Clark added. With money market curves virtually flat, banks are tending to only enter into repo trades overnight as there is no premium for lending longer-term. For example, the overnight rate for Spanish general collateral repo was last seen at 0.33 percent, according to ICAP, with the three-month rate at 0.35 percent.

Money markets key libor dollar rate slows rise, repo rates elevated

(Adds J. P. Morgan Libor forecasts, byline)By Richard LeongNEW YORK Aug 14 A key interbank lending rate rose at a slower pace on Friday following its biggest single-day increase in more than five years, while overnight borrowing costs for Wall Street remained elevated. The London interbank offered rate for three-month dollar borrowings climbed to 0.32445 percent, the highest since October 2012, from Thursday's fixing of 0.32050 percent. The 0.4 basis point rise was less than half its 1.1 basis point jump on Thursday, which was its biggest gain since May 2010. This benchmark rate for $350 trillion worth of financial products has been posting a series of multi-year peaks as traders have anticipated the U.S. Federal Reserve would raise interest rates by the end of the year. J. P. Morgan analysts forecast on Friday if the U.S. central bank were to raise rates in its September 16-17 policy meeting, three-month dollar Libor would rise to 0.55 percent.

One-month Libor and six-month Libor would climb to 0.46 percent and 0.84 percent, respectively, compared with 0.19960 percent and 0.52490 percent on Friday, the analysts said in a research note. Meanwhile, the interest rate on U.S. repurchase agreements was last quoted at 0.23 percent to 0.26 percent early Friday , compared with 0.25 percent late Thursday, according to ICAP.

In the repo market, money funds and other investors make short-term loans to banks and Wall Street dealers. Banks and dealers pledge Treasuries and other securities as collateral. The U.S. Treasury Department this week sold $64 billion in bonds for its quarterly refunding to mixed results. Typically, Wall Street dealers who buy bonds at auctions seek funding in the repo market until they settle.

In the derivatives market, interest rate futures fell as jitters about China's devaluation of its currency earlier this week abated. The surprise move in a bid to help Chinese exporters roiled financial markets worldwide and stoked bets the Federal Reserve would delay an interest rate increase. Beijing took steps to ease concerns about further devaluation, but some analysts remain wary. The yuan held steady versus the greenback on Friday, but booked a record 2.9 percent weekly loss. U.S. interest rate futures suggested traders expect a 45 percent chance the Federal Reserve will raise rates at its Sept. 16-17 meeting, up from 39 percent on Thursday, according to CME Group's FedWatch program.

Money markets libor ends week higher for first time this year

The cost for banks to borrow three-month, unsecured dollar-based funds increased this week, posting the first weekly rise in 2012 as the positive effects of cheap central bank loans on funding levels appeared to taper off. The three-month dollar London interbank borrowing rate, or Libor, a benchmark for interest rate swaps and other products, was stable on Friday at 0.47365 percent, but ended the week higher after declining to 0.47355 percent a week ago. The rate has fallen from over 0.58 percent at the beginning of the year, in large part driven by improved market liquidity since the European Central Bank first offered cheap three-year loans in December."A large part of the initial decline was driven by excess liquidity introduced by the ECB," said Amrut Nashikkar, analyst at Barclays Capital in New York."Now it has had its impact and there is no additional liquidity being pumped," he added. "The only reason for sustained downward pressure from this point on would be fundamentals improving in peripheral Europe."The ECB loans have shored up bank funding levels and reduced fears of cascading defaults as banks struggle with exposures to risky sovereign debt in the region and as investors including U.S. money funds remain relatively cautious of lending to the area.

At the same time, investors remain wary that the region could face additional stress as nations grapple with high debt levels and slowing growth, and some fear that countries including Portugal may need to undergo similar debt swaps to Greece, which would be costly for the bond holders. The three-month dollar Libor rate remains much higher than the 0.25 percent area it traded at in mid-2011, before concerns about European bank health intensified. Barclays' Nashikkar recommends entering into positions such as interest rate swap spread wideners to take advantage of any renewed tick in the rate.

"When Libor was dropping there tended to be quite a bit of momentum, but since that has stabilized the market is more susceptible to widening in spreads," he said. Two-year interest rate swaps, which are also used as a proxy for bank credit risk, tightened half a basis point to 25.25 basis points on Friday. They have tightened from over 30 basis points in late February and more than 50 basis points in early January.

EURODOLLARS EXTEND DECLINE Most Eurodollar futures contracts dropped on Friday to their lowest levels this year as Treasuries also continued their price decline, though the pace of the selloff was stemmed by some weaker-than-expected inflation data. U.S. core consumer prices rose by 0.1 percent in February, lower than expectations of a 0.2 percent rise, while prices including the volatile food and energy category came in as expected with a 0.4 percent increase in the month."It came in a little softer than expected. If it had gone the other way, I think the market definitely would have continued to sell off," said Michael Chang, an interest rate strategist at Credit Suisse in New York. Bonds and futures have sold off dramatically this week as investors adjust expectations towards stronger economic growth and a reduced likelihood that the Federal Reserve will undergo a new round of bond purchases. Friday's data, however, "gives the Fed some room, some flexibility to stay dovish and not be forced by the market to deviate from the current course," Chang added.

Money markets short rates stay low, 4 week t bills sold

* 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 markets short term rates rise as bets on ecb cut fall flat

* 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.