MONEY MARKETS-Interbank tension surfaces as global worries weigh
Wed Aug 25, 2010 11:33am EDT
* Bank borrowing from ECB increases, average maturity up
* Widening gap between overnight and 3-month rates
* Swap rates tumble as longer-dated bonds markets rally
By William James
LONDON, Aug 25 (Reuters) - Banks increased borrowing from
the European Central Bank on Wednesday and sought longer loans,
in an early sign that worries over the health of the economy
were spilling into money markets.
At the ECB's refinancing operations euro zone banks took
less one-week money and more three-month loans, leading to a net
increase in overall ECB lending of around 2 billion euros.
Safe-haven assets and less risky currencies have rallied
strongly this week at the expense of equities due to the bleak
U.S. outlook, which threatens to undermine recovery in the euro
zone.
"Things were going a bit better, but when the stock
exchanges went down, you immediately saw the effect of that in
the money markets," a money market trader said.
"Banks will not lend to each other in longer terms and this
will keep a difficult situation going for even longer."
This tension was demonstrated in the short-term markets both
by banks' increased reliance on ECB loans and a widening gap
between overnight and longer-dated money market rates.
Overnight rates -- expected to rise as banks are weaned off
ECB support -- have trended down over the last two maintenance
periods because the level of ECB loans in the system has
remained relatively constant. On Tuesday, Eonia EONIA= fixed
at 0.41 percent and was seen falling further below 40 bps.
Meanwhile, the benchmark three-month interbank Euribor and
euro Libor rates have plateaued and show little sign of
decreasing, suggesting a renewed reluctance to lend between
banks over longer terms.
Three-month euro Libor EUR3MFSR= fixed slightly higher at
0.82875 percent, while equivalent Euribor EURIBOR3MD= rose
slightly to 0.89 percent. The spread between three-month Euribor
and Eonia has widened by 17.5 bps since mid July.
With risk appetite suffering globally, pressure appears to
have resumed on the euro zone's higher-yielding states, adding
to interbank tension.
"I would see this against a background of renewed, increased
tension in peripheral sovereign bond markets," said Klaus
Baader, chief European economist at Societe Generale.
"Generally when risk aversion increases funding conditions
become tighter, in particular for banks in those countries which
are seen as fiscally vulnerable."
Ireland's credit rating was cut late on Tuesday with rating
agency Standard and Poors citing the cost of supporting the
ailing Irish financial sector.
SWAP RATES TUMBLE
The tension in markets over the global outlook was also seen
in interest rate swaps where the 10-year euro swap rate sank to
a new record low and 30-year swaps again fell.
The drive for a return on low-risk assets has seen bond
curves flatten. This in turn is driving swap rates lower.
"For a good steepening you probably need a reversal of the
initial impetus... you need stronger data basically and for a
reassessment where markets bring forward their policy rate
expectations instead of pushing them back," said Robert Crossley
rate strategist at Citigroup.
Wed Aug 25, 2010 11:33am EDT
* Bank borrowing from ECB increases, average maturity up
* Widening gap between overnight and 3-month rates
* Swap rates tumble as longer-dated bonds markets rally
By William James
LONDON, Aug 25 (Reuters) - Banks increased borrowing from
the European Central Bank on Wednesday and sought longer loans,
in an early sign that worries over the health of the economy
were spilling into money markets.
At the ECB's refinancing operations euro zone banks took
less one-week money and more three-month loans, leading to a net
increase in overall ECB lending of around 2 billion euros.
Safe-haven assets and less risky currencies have rallied
strongly this week at the expense of equities due to the bleak
U.S. outlook, which threatens to undermine recovery in the euro
zone.
"Things were going a bit better, but when the stock
exchanges went down, you immediately saw the effect of that in
the money markets," a money market trader said.
"Banks will not lend to each other in longer terms and this
will keep a difficult situation going for even longer."
This tension was demonstrated in the short-term markets both
by banks' increased reliance on ECB loans and a widening gap
between overnight and longer-dated money market rates.
Overnight rates -- expected to rise as banks are weaned off
ECB support -- have trended down over the last two maintenance
periods because the level of ECB loans in the system has
remained relatively constant. On Tuesday, Eonia EONIA= fixed
at 0.41 percent and was seen falling further below 40 bps.
Meanwhile, the benchmark three-month interbank Euribor and
euro Libor rates have plateaued and show little sign of
decreasing, suggesting a renewed reluctance to lend between
banks over longer terms.
Three-month euro Libor EUR3MFSR= fixed slightly higher at
0.82875 percent, while equivalent Euribor EURIBOR3MD= rose
slightly to 0.89 percent. The spread between three-month Euribor
and Eonia has widened by 17.5 bps since mid July.
With risk appetite suffering globally, pressure appears to
have resumed on the euro zone's higher-yielding states, adding
to interbank tension.
"I would see this against a background of renewed, increased
tension in peripheral sovereign bond markets," said Klaus
Baader, chief European economist at Societe Generale.
"Generally when risk aversion increases funding conditions
become tighter, in particular for banks in those countries which
are seen as fiscally vulnerable."
Ireland's credit rating was cut late on Tuesday with rating
agency Standard and Poors citing the cost of supporting the
ailing Irish financial sector.
SWAP RATES TUMBLE
The tension in markets over the global outlook was also seen
in interest rate swaps where the 10-year euro swap rate sank to
a new record low and 30-year swaps again fell.
The drive for a return on low-risk assets has seen bond
curves flatten. This in turn is driving swap rates lower.
"For a good steepening you probably need a reversal of the
initial impetus... you need stronger data basically and for a
reassessment where markets bring forward their policy rate
expectations instead of pushing them back," said Robert Crossley
rate strategist at Citigroup.