MONEY MARKETS-Money market rates ease after liquidity increase
Thu Jul 29, 2010 9:21am EDT
* Eonia, short euro rates lowest since mid-July
* Euribor edges up but rise seen overdone
* Liquidity seen staying ample at least until year-end
By Kirsten Donovan
LONDON, July 29 (Reuters) - Euro zone money market rates
fell to their lowest level since mid-July on Thursday after
excess liquidity in the banking system increased modestly this
week.
But the benchmark unsecured euro Libor rate fixing continued
to edge higher, with institutions still reluctant to lend to one
another, despite recent bank stress tests giving most of the
region's banks a clean bill of health.
The Eonia overnight rate EONIA= dipped to 0.478 percent at
Wednesday's fixing, its lowest since July 15, after banks
increased liquidity by more than 7 billion euros at this week's
European Central bank lending operations.
That in turn pulled three- and six-month Eonia rates
EUREON3M= EUREON6M= to their lowest levels in two weeks.
"This week's (ECB operations) have seen a further uptake in
excess liquidity ... and that could make itself felt and begin
to push Eonia down further," said Societe Generale's chief
European economist James Nixon, adding that the bank saw the
overnight lending rate as low as 0.40 percent by the end of the
current reserve period on August 10.
Excess liquidity generally increases towards the end of the
reserve period, with banks preferring to frontload payments into
their reserve accounts.
The ECB has pledged to continue to provide unlimited funds
until September and unlimited shorter-dated liquidity into
October, but expectations excess cash in money markets could be
whittled away as the central bank normalises its lending
practices may partially be behind the rise in Libor fixings.
Many analysts expect at least the provision of unlimited
short-term liquidity to be extended and ECB Governing Council
member Ewald Nowotny said last week it would be premature to
consider no longer offering unlimited three-month funds.
[ID:nSLALIE68P]
"Excess liquidity is not likely to completely disappear
because of the previous, yet not matured ... operations," Nomura
rate strategist Fred Goodwin said in a note.
"Moreover, there is a reasonable probability that the full
allotment tenders are extended."
EURIBOR LOOKING "TOPPY"
Benchmark three-month euro Libor rates EUR3MFSR= fixed a
third of a basis point higher at 0.83344 percent, with
equivalent Euribor rates EURIBOR3MD= just shy of 0.9 percent.
"At the moment Euribor is looking a little toppy," said SG's
Nixon, adding he expected it to ease around 10 bps.
"It's likely a reaction to the spike in Eonia earlier in the
maintenance period and immediately after the 12-month tender
expired. The reality of the situation is that there is still a
significant amount of excess liquidity and that should be
maintained at least until the end of September."
Banks in Greece, Portugal, Spain and other heavily-indebted
parts of the euro zone have been locked out of normal
bank-to-bank lending markets during the most turbulent periods
of the financial and debt crises, leaving them almost entirely
dependent on the ECB for funding.
The ECB also toughened up its lending rules on Wednesday,
saying that from next year banks would face higher penalties if
they use weaker-rated assets as collateral to borrow ECB cash.
[ID:nLDE66R1P3]
"We interpret the fact that the ECB announced the increase
in collateral haircut in the current phase as a positive sign of
the improvement in the banking sector's condition," Barclays
Capital said in a note.
"In this respect, we consider it as a further small step in
the direction of normalisation."
(Reporting by Kirsten Donovan; Editing by Susan Fenton)
Thu Jul 29, 2010 9:21am EDT
* Eonia, short euro rates lowest since mid-July
* Euribor edges up but rise seen overdone
* Liquidity seen staying ample at least until year-end
By Kirsten Donovan
LONDON, July 29 (Reuters) - Euro zone money market rates
fell to their lowest level since mid-July on Thursday after
excess liquidity in the banking system increased modestly this
week.
But the benchmark unsecured euro Libor rate fixing continued
to edge higher, with institutions still reluctant to lend to one
another, despite recent bank stress tests giving most of the
region's banks a clean bill of health.
The Eonia overnight rate EONIA= dipped to 0.478 percent at
Wednesday's fixing, its lowest since July 15, after banks
increased liquidity by more than 7 billion euros at this week's
European Central bank lending operations.
That in turn pulled three- and six-month Eonia rates
EUREON3M= EUREON6M= to their lowest levels in two weeks.
"This week's (ECB operations) have seen a further uptake in
excess liquidity ... and that could make itself felt and begin
to push Eonia down further," said Societe Generale's chief
European economist James Nixon, adding that the bank saw the
overnight lending rate as low as 0.40 percent by the end of the
current reserve period on August 10.
Excess liquidity generally increases towards the end of the
reserve period, with banks preferring to frontload payments into
their reserve accounts.
The ECB has pledged to continue to provide unlimited funds
until September and unlimited shorter-dated liquidity into
October, but expectations excess cash in money markets could be
whittled away as the central bank normalises its lending
practices may partially be behind the rise in Libor fixings.
Many analysts expect at least the provision of unlimited
short-term liquidity to be extended and ECB Governing Council
member Ewald Nowotny said last week it would be premature to
consider no longer offering unlimited three-month funds.
[ID:nSLALIE68P]
"Excess liquidity is not likely to completely disappear
because of the previous, yet not matured ... operations," Nomura
rate strategist Fred Goodwin said in a note.
"Moreover, there is a reasonable probability that the full
allotment tenders are extended."
EURIBOR LOOKING "TOPPY"
Benchmark three-month euro Libor rates EUR3MFSR= fixed a
third of a basis point higher at 0.83344 percent, with
equivalent Euribor rates EURIBOR3MD= just shy of 0.9 percent.
"At the moment Euribor is looking a little toppy," said SG's
Nixon, adding he expected it to ease around 10 bps.
"It's likely a reaction to the spike in Eonia earlier in the
maintenance period and immediately after the 12-month tender
expired. The reality of the situation is that there is still a
significant amount of excess liquidity and that should be
maintained at least until the end of September."
Banks in Greece, Portugal, Spain and other heavily-indebted
parts of the euro zone have been locked out of normal
bank-to-bank lending markets during the most turbulent periods
of the financial and debt crises, leaving them almost entirely
dependent on the ECB for funding.
The ECB also toughened up its lending rules on Wednesday,
saying that from next year banks would face higher penalties if
they use weaker-rated assets as collateral to borrow ECB cash.
[ID:nLDE66R1P3]
"We interpret the fact that the ECB announced the increase
in collateral haircut in the current phase as a positive sign of
the improvement in the banking sector's condition," Barclays
Capital said in a note.
"In this respect, we consider it as a further small step in
the direction of normalisation."
(Reporting by Kirsten Donovan; Editing by Susan Fenton)