Finance and Markets | Financial news

Money markets elevated repo rates seen persisting as coupons settle

will likely remain elevated at least through Monday when the Treasury's recent coupon auctions settle. The government sold a total of $66 billion in three-, 10- and 30-year Treasuries this week on Tuesday, Wednesday and Thursday, respectively. The settlements "will add more collateral to a heavy amount already floating around," said Roseanne Briggen, market analyst at IFR, a Thomson Reuters unit.

Overseas, LIBOR (London Interbank Offered Rates) three-month dollar rates were set at 0.33425 percent on Friday, down from 0.34025 percent on Thursday, the British Bankers' Association said. Markets ignored S&P's two-step downgrade of Spanish debt, reasoning that the downgrade would nudge Spain closer to requesting a bailout from the European Central Bank.

Italian Prime Minister Mario Monti said on Friday that any request by Spain for ECB support to lower its borrowing costs would calm financial markets. Spanish Prime Minister Mariano Rajoy, who has said he will only make a decision on the matter when he has all the details, is thought to be waiting for regional elections on Oct. 21 and may delay a decision further if bond yields remain manageable.

The ECB's plan to buy the bonds of struggling member states has raised hopes of an end to the most acute phase of the euro zone's crisis, but this has been undermined by Spain's delay in asking formally for such aid. Italy, the euro zone's third-biggest economy, has a large deficit and the slowest average growth rate in the European Union. Its yields often track just below those of Spain. The spread of three-month Libor rates over three-month OIS rates, calculated from Reuters data, expresses the three-month premium paid over anticipated central bank rates, or Overnight Index Swap rates.

Money markets fed unlikely to follow ecb rate cut ubs

* US excess reserve rate cut might disrupt money market funds* European money markets tackle uncharted waters* Search for yield as more rates turn negativeBy Chris Reese and Kirsten DonovanNEW YORK/LONDON, July 13 The U.S. Federal Reserve is unlikely to follow the European Central Bank's move to a zero percent deposit rate due in part to fears of disruptions to money market funds, according to UBS strategist Chris Ahrens. The ECB last week cut its main refinancing rate to 0.75 percent and its overnight deposit rate - which is paid to banks that park cash in the central bank's deposit account - to zero. U.S. money market fund managers breathed a sigh of relief earlier this week after minutes from the Fed's June policy meeting showed no indications the central bank was considering cutting the interest rate it pays on excess reserves to banks. Many fund managers believe any cut in the rate, which currently stands at 0.25 percent, would cause disruptions in funding markets, especially money market funds."We agree with our economists that the Fed is unlikely to reduce interest on excess reserves (IOR)," Ahrens said. "The Fed discussed this alternative in detail at the September 2011 meeting but was reluctant to exercise this option. Moreover, June 2012 Federal Open Market Committee (FOMC) meetings did not mention IOR, and recent speeches have not included it."

"The Fed's reluctance to cut the rate stems primarily from 'concerns that reducing the IOR rate risked costly disruptions to money markets and to the intermediation of credit'," Ahrens said, quoting from FOMC minutes from Sept. 20-21, 2011."Our read is that the central bank worries that reducing IOR would elicit meager gains at the potential cost of eroding the architecture of the financing markets and fracturing the link between the policy rate and various funding rates," Ahrens said. Meanwhile, implementation of the ECB's zero percent deposit rate this week has pushed money markets into uncharted territory, forcing many to accept negative returns while Seemingly doing little to spur bank lending. T-bill yields and repo rates are below zero for the euro zone's more-trusted "core" countries and they are falling even for Spain and Italy - despite the euro zone debt crisis appearing no closer to being resolved. Bank-to-bank Euribor lending rates are in free fall.

The changes came into force with the start of the new maintenance period on Wednesday but JPMorgan Chase & Co, BlackRock Inc, which is the world's largest money manager, and Goldman Sachs Group Inc had already restricted investor access to European money market funds . Commerzbank strategist Christoph Rieger described the move to zero or negative rates as "a small step for the ECB but a giant leap for money markets"."While some investors will likely still be willing to pay a price for safe investments, others will either be keen to exit the euro or should grudgingly revise their credit and duration limits... in an attempt to preserve the nominal value of their investments," he said in a note. While banks are now not making any cash from the ECB, analysts are skeptical that they will increase lending to the wider economy in response. But there is some suggestion that banks may be seeking even modest returns by buying more sovereign debt - which could potentially ease euro zone policymakers' headaches somewhat on that front. Tradeweb quotes one-month T-bill yields for Germany, France, Holland and Belgium at close to zero or below, while Spanish yields have fallen to 0.90 percent from around 1.5 percent ahead of the ECB meeting.

Similarly, secured lending rates in the repo market - where banks commonly use government bonds as collateral to raise funding - have collapsed. General collateral repo rates, which are paid to borrow funds against a basket of government bonds, are negative for the core countries and falling in Spain and particularly Italy. An Italian bond auction on Friday saw good demand despite a ratings cut earlier in the day."Italy appears to have been a major beneficiary of the search for yield," said ICAP economist Don Smith, referring to the repo market."Bid interest in this market has surged in the last two days and repo rates have correspondingly dropped...(jibing) with the previous rising trend set against a backdrop of elevated lending concerns."With no incentive for banks to deposit money at the ECB overnight, cash is being hoarded in institutions' current accounts, central bank data showed this week. While it is impossible to tell how much money may be being used to buy shorter-dated government bonds from the figures, there is only anecdotal evidence from market players. However, Smith says reports from Brokertec's euro government bond platform suggest a "scramble" for short-dated Austrian, Belgian, French and Dutch debt.

Money markets hopes of ecb bond buying underpin trade

* Hopes high ECB will restart bond buying this week* Only limited relief seen from such a move* Market prices in 50 pct chance of rate cut by year-endBy Kirsten DonovanLONDON, July 31 Markets are pricing in around a 50 percent chance that the European Central Bank will cut interest rates again this year but are likely to react badly if they have to wait longer than a couple of days for it to revive its bond-buying programme. ECB President Mario Draghi said last week the ECB would do "whatever it takes", spurring expectations that the central bank will reactivate the Securities Market Programme (SMP) at Thursday's policy meeting. The SMP - which the Bundesbank opposes - has been dormant for months but would be used to buy Spanish and Italian bonds in the secondary market. The prospect of this has pushed yields on bonds issued by the two struggling countries sharply lower, but the rally is showing signs of running out of steam.

"Some of the confidence generated by Draghi is already fading - you can see that in the fall in Bund yields today," said BNP Paribas rate strategist Matteo Regesta."To make sure the relief rally we've seen is not further interrupted, at the very least we need a reactivation of the SMP. An interest rate cut by itself would fall short of what the market is expecting. Money markets aren't expecting a cut in either of the ECB's two main interest rates this week, or the "bazooka" option of granting the euro zone's rescue fund a banking license, allow it to exchange bonds it buys for fresh cash from the ECB. The main refinancing rate is at 0.50 percent, while the deposit rate paid to banks who park cash overnight is at zero. A cut in the deposit rate is increasingly priced in from September onwards, which would mean it would turn negative.

"Speculation may be overdone," said Commerzbank rate strategist Benjamin Schroeder."There are complications with negative rates but with the comments from the ECB members, the speculation could still run further."The overnight Eonia rate, which is currently around 10 basis points above the deposit rate, is indicated at around 2 basis points by year-end, suggesting a deposit rate of around minus 10 basis points.

PROMISES Financial markets are looking for a clear policy response from Draghi at the ECB's Thursday policy meeting . Nineteen of 24 euro money market traders polled by Reuters said the ECB will soon resume bond buying."The bar has been raised very high for the ECB to deliver something," Schroeder said. But analysts said even another round of bond buying would be unlikely to stabilise markets in the longer term, although it might ease the next few weeks combined with a sharp drop in new bond issuance over the summer period."It won't offer lasting relief, but it would allow August to be relatively stable," BNP Paribas' Regesta said."The real bazooka, even without activation, would be to grant the (euro zone rescue fund) a banking license... Just the presence of this vehicle with unlimited firepower would bring some peace to primary and secondary markets but we're not going to get that this week."

Money markets interbank rates hit new low but investors cautious

* Spanish and Italian bond yields rise* Banks may face higher margins in repo market* Investors wary after S&P downgrades SpainBy Emelia Sithole-MatariseLONDON, April 27 Benchmark interbank lending rates set a new 22-month low on Friday, held down by the European Central Bank's flood of cheap cash, but Spanish and Italian banks could face higher funding costs in the private repo market if their bonds remain under pressure. The ECB's 1 trillion euros of ultra-cheap, three-year funding to banks, started at the end of December, has driven interbank rates to half of what they were last August. But investors remained defensive on Friday as the euro zone debt crisis flared up once again, subduing activity in the interbank market. Standard & Poor's downgrade late on Thursday of Spain's credit rating by two notches to BBB-plus propelled the country's 10-year bond yields back above 6 percent, pulling Italian yields up in their wake.

S&P cited expectations that government finances would deteriorate as a result of a contracting economy and an ailing banking sector for the downgrade. A major risk for bank funding is that a rise in sovereign bond yields may lead to higher margins in the repurchase (repo) market, where banks use the bonds as collateral to access cash, making it a less effective method of funding. Clearing House LCH. Clearnet SA raised its margin rate on Spanish bonds late on Wednesday following the increase in the country's 10-year yields over the past month.

"If this volatility in the bond market continues we may start to see higher funding rates in Italy and Spain in the repo market," a trader said. Italian one-year general collateral (GC) rates were around 55-60 basis points on Friday, according to quotes from two traders, little changed from Monday. But German GC fell to seven basis points from Monday's 11-12 basis points, reflecting the demand for low-risk assets seen in the bond market. Traders said they were seeing little activity in lending beyond three months and few were willing to give quotes on Spanish GC."The downgrade of Spain was already priced into the market so I don't expect there will be a huge impact but it will have a negative effect on the functioning of the market," said Alessandro Giansanti, a rate strategist at ING.

"The private repo market will continue to stay highly illiquid as long as there will be the risk of a further deepening of the euro zone debt crisis."In the unsecured market, euro-priced interbank rates continued their march lower under pressure from the excess of cheap cash in the system. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and representing a mix of interest rate expectations and banks' appetite for lending, fell on Friday to 0.715 percent from 0.720 percent - the lowest since June 2010. Equivalent euro Libor rates also fell. Six-month rates fell to 1.007 percent from 1.013 percent and 12-month rates dropped to 1.321 percent from 1.329 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 stress indicators rise on greek uncertainty

* Stress gauges unlikely to reach last year's panic levels* ECB liquidity, dollar loans to keep lid on money market strainsBy Emelia Sithole-MatariseLONDON, May 16 Uncertainty about Greece's future in the euro nudged some indicators of money market stress higher on Wednesday, though still far short of last year's levels in a banking system saturated with central bank cash. Worries have intensified over Greece as it heads towards a new election next month that could hand power to leftists opposed to terms of an international bailout. Another growing concern is the possible cost of fixing Spain's banking system.

Three month euro/dollar cross currency basis swaps , which show the rate charged when swapping euro interest rate payments on an underlying asset into dollars, have widened to minus 54 basis points from around minus 46 bps in early May - its best level in nine months. The measure, which shows funding stress when investors compete for dollars, is expected to move wider in coming days but analysts say it is unlikely to get close to November's minus 167.5 when investors feared another credit crunch.

"Money markets are protected by the ECB's LTROs and the dollar swap lines," said Giuseppe Maraffino, a strategist with Barclays Capital. The European Central Bank's Long Term Refinancing Operations have given banks about 1 trillion euros in long term loans. Swap lines were set up between the U.S. Federal Reserve, the ECB and other major central banks to avert a repeat of the finiancial crisis that followed Lehman Brothers' collapse in 2008.

One trader said the swap lines meant the cost of buying dollars would be kept under control in capital markets after the central banks cut the cost of the loans. The difference between forward rate agreements (FRA) and Eonia rates - a gauge of credit risk - has also widened across the curve this week, prompting a sell-off in Euribor futures. The deterioration in the euro zone debt crisis has also fostered expectations in the markets that the ECB will cut interest rates by 25 basis points to 0.75 percent by the end of this year to protect the economy.