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Money markets eurodollars gain as ecb disappoints


Aug 2 U.S. Eurodollar futures contracts gained on Thursday after the European Central Bank disappointed some investors by taking no new immediate action to contain the region's debt crisis, increasing demand for safe haven U.S. debt. Eurodollar price gains were tempered, however, by expectations that the central bank is likely to take more forceful action to contain the region's debt crisis when it next meets in September. ECB President Mario Draghi said on Thursday that any intervention to curb Italy and Spain's spiraling debt costs would come at the earliest ion September and said that euro zone governments must act first."The ECB didn't really deliver any formal actions, just some promises," said Mike Lin, director or U.S. funding at TD Securities in New York.

Demand for safe-haven U.S. Treasuries had declined since last Thursday, when Draghi fanned expectations for more dramatic action by saying that the ECB would do "whatever it takes" to support the euro. The lack of action on Thursday boosted demand for U.S. Treasuries and sent longer-dated Eurodollars prices higher.

Gains were limited however, with investors now focused on whether the ECB will launch new bond purchases at next month's meeting."I'm surprised we haven't had more of a reaction," said TD's Lin. "Maybe it's the fact that there does seem like there's a bit of a promise that by next meeting something might happen, and maybe that's what's keeping markets from being too disappointed."

Separately, the New York Federal Reserve said on Thursday that it will begin testing the process for executing reverse repurchase transactions with primary dealers to ensure the system is operationally ready. The tests do not reflect a change in the Fed's monetary policy. The Fed has not conducted a reverse repo since 2008, and since then it has added six primary dealers to its roster and there have been several system changes, the New York Fed said in a release. The regional bank last month unveiled reforms for the $1.8 trillion triparty repo market that will force banks to reduce their reliance on the short-term loans and lessen the risks that they pose to the financial system.

Money markets future interbank rates seen rising near term


* Euribor futures rise across 2012 strip after German GDP* But rise seen only a brief pause in falling trend* Greek politics, banking risks weigh going forwardBy Marius ZahariaLONDON, May 15 Implied euro zone interbank rates fell on Tuesday after better than expected German economic data, but they are likely to resume their week-long rising trend soon as the Greek crisis moves towards a showdown. The December Euribor contract rose 3.5 ticks at 99.345 after Germany squashed fears that it was in recession, posting a 0.5 percent rise in the first quarter. This implies the three-month benchmark Euribor rate is expected to fix at 0.655 percent at the end of the year. But this compares with expectations of 0.53 percent before the Greek elections earlier this month and analysts expect it to soon reflect bets that Euribor will be higher at the end of the year than Tuesday's fixing of 0.687 percent. That prices in growing risks of a counterparty defaulting as opposition to bailout terms gathers momentum in Greece, increasing the threat of the country dropping out of the euro zone with damaging repercussions throughout the banking system.

Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, dismissed on Monday the prospect of a Greek euro exit as "propaganda"."The German GDP surprised on the upside, Mr. Juncker tried to make us believe that a Greek exit was not discussed at the Eurogroup meeting and Moody's downgrade for Italian banks was expected," said Vincent Chaigneau, head of fixed income strategy at Societe Generale."The news this morning was a bit less dramatic, but the situation remains quite tense," he said, adding that he saw room for Euribor futures to fall further."From a technical perspective, the December Euribor meets support at May and late April lows of 99.29-99.30, which if broken could pave the way to mid-March lows of around 99.20 - also the 38.2 percent Fibonacci retracement of the rally from late-November.

EXPOSED TO MORE DOWNGRADES While Moody's downgrade of Italian banks late on Monday was largely priced in, concerns remain about soaring bad loans in countries like Italy or Spain, which are hit by recession and austerity.

In particular, some market participants expect Spanish banks to need generous capital help from the government and say this may force the sovereign to seek outside help as well."The key driving force is not only the Greek situation but also the situation of the European banking system which is exposed to other downgrades," BNP Paribas rate strategist Patrick Jacq said. He said that the large excess liquidity in the system and expectations that the European Central Bank will maintain interest rates low for a long period should keep forward euro overnight Eonia rates subdued. This would push the Euribor/Eonia and Libor/Eonia spreads - used for gauging money market stress - wider in the near future. ECB meetings are going to be decisive for the trend of those spreads. Any sign that the central bank is willing to introduce additional monetary easing measures would calm down interbank markets and trigger a rally in Euribor futures."If the ECB takes more non-standard measures ... there will be relief and possibly push those ... (spreads) tighter, but the next ECB meeting is three weeks away and in the meantime what is going to dominate is the sovereign situation and concerns about banks," SocGen's Chaigneau said."So for the next couple of weeks the risk would be for widening of the spreads and a fall in futures."

Money markets overnight repo rates steady, but may face pressure


* U.S. overnight repos steady near top of recent range* Europe investors seeking derivatives carrying longer maturitiesBy Chris Reese and Marius ZahariaNEW YORK/LONDON, Sept 21 U.S. overnight lending rates held steady o n F riday at the high end of a recent range, but they could ease early next year after a Federal Reserve stimulus program comes to an end, according to analysts at Barclays. The interest rate on overnight repurchase agreements were last quoted at 0.29 percent, unchanged from late Thursday. Overnight repo rates have generally been trading in a range of 0.17 percent to 0.31 percent since mid-January. Those rates could come under downward pressure early next year after the Fed winds up its stimulus program, dubbed "Operation Twist," under which the central bank is selling shorter-dated U.S. Treasuries and using the proceeds to buy longer-dated Treasuries in an effort to lower long-term borrowing costs like those on mortgages."As primary dealer inventories of Treasuries normalize after the Twist sales end, repo rates, in particular, should start to inch lower," Ajay Rajadhyaksha and Dean Maki, analysts at Barclays in New York, said in a research note.

The Fed last week announced a new open-ended program under which it will buy $40 billion of mortgage-backed securities per month, known as QE3, and said Operation Twist will continue as scheduled through the end of the year. As part of Twist, the Fed on Friday bought $1.784 billion of Treasuries maturing November 2022 through February 2031. Meanwhile, in Europe, investors dissatisfied with short-term interest rates close to zero are increasingly seeking derivative instruments carrying longer maturities, taking the risk of a sudden shift in central bank policy. Record low official European Central Bank interest rates and excess liquidity in the euro zone system of 750 billion euros, according to Reuters calculations, have pushed money market rates to record lows.

Speculation that the ECB could cut its deposit facility rate below the current zero percent, meaning investors would pay a fee to park their money, is putting even more pressure on rates. The overnight euro interbank rate, Eonia, last fixed just below 0.1 percent. Forward financial contracts that represent bets on where Eonia is going to settle at certain points in the future see the rate below 0.1 percent for the next two years. Searching for higher returns, investors are moving toward longer duration. This week, for instance, the four-year Eonia narrowed by 10 basis points to 0.40 percent.

Commerzbank rate strategist Christoph Rieger in Frankfurt recommends bets that the 1y1y Eonia forward -- a financial product that targets the level of a one-year Eonia contract starting in one year's time -- will fall to last month's lows of just above 10 bps from around 20 bps."Even if the ECB does not cut the depo rate further, which remains our base case, prospects of unchanged rates, abundant excess liquidity and potentially lower EONIA-depo spreads should be enough reasons to expand into this part of the curve," he said in a note. Societe Generale rate strategist Ciaran O'Hagan in Paris believes it makes sense to place similar bets even further out on the curve, even if the time period goes beyond the massive three-year cash injections made by the ECB last December and in February. The main risk investors are taking is a possible pick-up in the global economy that could prompt central banks to reverse or discontinue some of their more radical experiments in monetary policy easing. But given the state of the world's major economies and the depth of the euro zone debt crisis, investors seem willing to take the risk."Central banks around the world are going to continue to provide liquidity," O'Hagan said. "The long-term challenges we're facing are so severe and so dramatic that at the moment this is how you want to be positioned."

Money markets rate cut bets may be overdone if ecb buys bonds


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.

Money markets short term funding conditions improve


* Funding conditions for non-U.S. banks improve * Demand ebbs for 3-month part of Fed's liquidity swap lines * Euribor rates hit 16-month low; may fall to record By Ellen Freilich NEW YORK, March 5 A drop in demand for three-month dollars the European Central Bank auctioned to replace money it lent to European banks in December shows non-U.S. banks' access to short-term funding has improved. The ECB made the loans through the Federal Reserve's central bank dollar liquidity swap program, originally started in December 2007 to address severe strains in global short-term dollar funding markets. Demand in the most recent auction for three-month dollars offered by the ECB through the program fell to less than a third of what it was in December as European banks rolled over just $14.5 billion of the $51 billion in maturing loans. "In December, people wanted to make sure they had dollars for year end, but at the replacement auction, they only replaced about $14 billion of it and the total amount outstanding in the Fed's liquidity program will go down as a result," said Joseph Abate, market analyst at Barclays Capital in New York. The development is consistent with Libor rates, which have been easing, and a rise in both the level and average duration of financial commercial paper outstanding. All the trends suggest the "the sense of urgency about getting dollars has abated a little bit," Abate said. That auction of three-month paper occurred against the backdrop of the ECB's longer-term refinancing operation and augurs well for banking system stability. "The LTROs (Long Term Refinancing Operation) were extremely effective against having another Lehman-type freeze up," said James Kee, chief economist at South Texas Money Management in San Antonio, Texas, refering to the Wall Street investment firm whose collapse in 2008 is thought to have played a major role in the global financial crisis. "We're not out of the woods yet, but I'm hoping market moves (on funding concerns) will become less and less severe as markets become more and more convinced that the global financial system is not at risk of collapse," Kee said. Abate said markets are in a multi-year period where fear intensifies and then settles down again. The Fed re-established its central bank dollar liquidity swap program when funding strains re-emerged in May 2010. The swap lines have been extended several times since then. "The Fed doesn't want its central bank liquidity swap lines to become permanent, but it hasn't been able to build the escape velocity to leave this all behind," he said. "Things start to get better and then some other exogenous shock comes and knocks the market back on its heels again. "You need to get confidence restored so people wouldn't hoard liquidity every time something happens," he said. The ability of European banks to fund dollar-denominated assets they own in the private market has improved and interbank lending rates could keep heading lower as a result, said Pierre Ellis, senior economist at Decision Economics. Euro zone interbank lending rates headed toward record low levels on Monday. But liquidity is not the whole story and thus the declines could start to occur more gradually, Ellis said. "The liquidity issue for European banks has been resolved, but now you're looking at the inherent risk of their portfolios which is tied to the outlook for the European economy," he said. Three-month Euribor fixed at a fresh 16-month low of 93.4 basis points on Monday. The rate has fallen every day since Dec. 19, declining by nearly 50 bps in that period. Euribor futures showed the rate was forecast to be 82 bps at the March contract expiry on March 19. In the U.S. short-term debt markets, prospects for lower repo rates into the end of the month and for reduced bill supply heading into the middle of the second quarter partnered with attractive yields to draw buyers to the Treasury's auctions of three-month bills last week and this week, said Thomas Simons, money market economist at Jefferies & Co. Demand for the six-month Treasury bill auction was less fervent.

Money markets tensions not seen easing much as banks hoard cash


* Euro zone banks hoard record amounts of cash* Overnight borrowing reflects dislocation* Money market tensions not seen easing muchBy Kirsten DonovanLONDON, Jan 3 The euro zone banking system starts the new year awash with record levels of liquidity but few signs that institutions are prepared to lend to each other, leaving money markets frozen. Most of the near half trillion euros of three-year funds borrowed from the European Central Bank in the last week of 2011 have made their way back to the ECB's overnight deposit account. Use of the facility was close to 450 billion euros on Monday night. But, reflecting the dislocation in short-term funding markets, at least one other bank borrowed 14.8 billion euros from the ECB's punitively priced emergency lending facility.

What happens to the excess liquidity in coming weeks will be key. But with banks facing heavy refinancing schedules this year, those looking for a revival in money markets may be disappointed."My sense is that we will see some easing of tensions, but that's a natural seasonal thing," said Simon Smith, chief economist at FxPro."But it's unlikely to be that substantial because of the bank refunding that needs to be done and the three-year money was in part intended to help with that."Benchmark three-month euro Libor rates fixed a basis point lower at 1.26857 percent, and down around 6 basis points since the injection of three-year funding.

But the spread over equivalent maturity overnight indexed swap (OIS) rates has barely budged - it stands just a couple of basis points lower at 88 basis points - and RBS said there is unlikely to be a material tightening."The reduction of tail risk for banks, where the ECB has effectively backstopped the system reduces counterparty risk to the extent a Lehman type event is a lower probability," strategist Harvinder Sian said."Until the sovereign risk is reduced (spreads) are unlikely to trend narrow - and our view remains much more cautious in that sovereign defaults are likely in 2012, starting with Greece."

Concern over banks' exposure to the sovereign debt crisis has closed money markets and longer-term financing markets. Societe Generale calculates that the roughly 200 billion euros in extra funding available to banks since the three-year tender only corresponds to an estimated financing gap for 2012 based on longer-term debt redemptions and deleveraging. Even with another three-year tender in February, that means banks are unlikely to use the cash to buy euro zone government bonds, the so-called carry trade, anticipation of which drove shorter-term Italian and Spanish bond yields sharply lower at the end of the year."Banks are torn between using cheap borrowing to boost profits and intense market and regulatory pressure towards deleveraging," SG analysts said."We continue to believe that the latter is too strong a force. The large (three-year cash) take-up should reduce the speed of asset selling, but we doubt it will lead to aggressive buying of sovereign bonds."Banks did, however, cut their take-up of one-week ECB funding by just under 15 billion euros on Tuesday , although it is quite usual to see a reduction in such borrowing as the monthly maintenance period advances.