* Take up of 7-day ECB funding announced at around 1000 GMT* Markets on lookout for signs of restocking after LTRO repayment* Three-month funding to be also offered on WednesdayBy Marc JonesLONDON, Jan 29 Money markets are preparing for a lively couple of days as banks get two chances to replace the three-year ECB crisis loans they will repay this week with alternative shorter-term funding. On Wednesday banks will return 137.2 billion euros - just over a quarter - of the 489 billion euros they borrowed in the first of the ECB's twin three-year loan offerings just over a year ago.
When the ECB announced the larger-than-expected amount on Friday, wholesale bank funding prices jumped as markets realised it removed a thick slice of the 600 billion euros of so-called 'excess liquidity' which has kept rates pinned to the floor for over a year. That money can potentially be re-borrowed, however. Later on Tuesday banks get their usual weekly opportunity to order seven-day ECB funding and on Wednesday there is a monthly offering of three-month loans. They will receive the money on Wednesday and Thursday.
A major take-up in either of the tenders would reduce the impact of the three-year loan payback and send market rates back down. But the latest Reuters poll suggests there will be no major restocking. Banks are expected to take just 14 billion euros more combined than they did in the two equivalent operations a week and three months ago. If correct, it means once dust of the three-year loan repayment settles the overall amount of cash in the banking system would have been cut by around 120 billion euros.
Traders think that market rates could give back some of their recent gains once it is all out of the way, but not much. Benchmark three-month Euribor rates hit their highest level in four months on Monday while one-year eonia rates are at their highest since mid-June."I would expect a little bit bigger amount in the one-week and the three-month tender but not that big. Maybe after everything there would be an overall reduction of around 100 billion euros," said one euro zone-based trader who requested anonymity"I would think 12- and 6- month eonia perhaps would come back down a little bit and then we will see where we go from there," he added.
* Tepid demand for U.S. Treasury four-week bills* Better returns available in the repo marketBy Ellen FreilichNEW YORK, March 20 A $40 billion Treasury sale of four-week bills drew the most tepid bidding in just over a month on Tuesday as better rates available in the repo market damped demand for bills offering less attractive returns. The value of bids offered over those accepted at this week's bill auction was 3.99, the lowest since Feb. 14. Dealers' bid was $2 billion smaller than a week earlier, yet they captured a portion of the sale that was $2 billion larger than last week's and amounted to 73.2 percent of the bills sold. Direct bidders took 10.9 percent of the bills, toward the lower end of the recent range."With repo rates ranging from the low teens to mid-20s, demand for 4-week bills yielding 10 basis points or less has been weak," said Thomas Simons, vice president and money market economist at Jefferies & Co in New York. Only investors who have to adjust the average duration of their portfolios "are participating in the auctions," he said. OVERNIGHT TREASURY REPO RATES HAVE CHEAPENED
Overnight Treasury repo rates have cheapened steadily all month and by late last week, the collateral had cheapened to more than 20 basis points and the repo rate was at its highest level since last summer's debt-ceiling crisis."Besides the temporary balance-sheet distortion at quarter-end, which will push repo rates lower, we expect collateral rates to stick near current levels until mid-April," said Barclays Capital market analyst Joseph Abate in New York. Abate said supply appeared to be driving that trend. Dealers' inventories of short coupons and bills climbed to over $80 billion in the first week of March, and dealers have also held "a respectably sized" long position in Treasuries maturing in more than 11 years, he said. Dealers' only short position is in the intermediate sector with Treasuries maturing in six to 11 years.
Abate said the "pile-up" of Treasuries on dealer balance sheets is linked to the Federal Reserve's "Operation Twist" transactions in which the Treasury sells shorter-dated maturities on its balance sheet and uses the proceeds to buy longer-dated Treasuries to keep long-term interest rates low."It takes time for dealers to re-distribute the short-dated paper to final buyers and meanwhile, the dealers need to finance these holdings in the repo market," Abate said. The normal seasonal rise in bill supply has also contributed to higher repo rates, analysts said. That factor should start to fade once the April 17 deadline for U.S. tax returns has passed.
As revenues arrive from taxpayers, the Treasury's need to raise short-term cash will decline and so will bill supply. The Treasury Borrowing Advisory Committee expects bill supply to contract by $120 billion in the second quarter."With (the Fed's) Operation Twist sales continuing through the end of June, we look for repo rates to remain heavy - but closer to 15 basis points," Abate said. One element of uncertainty is whether government-sponsored enterprises (GSEs) will soon return to the repo market."Since July 2011, GSEs have been leaving sizable balances in their deposit account at the Federal Reserve uninvested - generally over $40 billion, but in some weeks much more than that," Abate said. Since these balances are unremunerated, the GSEs have an incentive to invest their cash in the repo, bill, and to a much smaller extent, the (shrunken) fed funds market, he said. When repo rates were under 10 basis points last year, the reward for investing in these markets were probably too small to persuade the GSEs to accept counterparty risk instead of leaving their cash safely at the Fed, Abate said."But now that overnight collateral has cheapened to 20 basis points, the incentive for GSEs to invest in the repo, bill and fed funds markets may be stronger," he said."If GSEs reduce their balance at the Fed and push their cash into the repo market, collateral rates could richen," Abate said.
* All eyes on ECB 3-yr tender, consensus demand at 492 bln* Risk outlook post-ECB tender to drive interbank rates* High take-up relief could give way to structural concernBy William JamesLONDON, Feb 24 Interbank markets will remain in the thrall of broader investor risk appetite next week as the European Central Bank reveals demand for its three-year loans, with a high take-up likely to buoy sentiment and push lending rates lower. Financial markets will be holding their breath on Wednesday when the ECB unveils how much three-year cash banks have borrowed in the second, and possibly last, ultra-long lending operation. In a bid to alleviate bank funding pressures the ECB has loosened collateral rules and temporarily opened up unlimited access to long-term loans - a move that has also soothed spiking tensions in the sovereign bond market. In the past, interest in central bank liquidity operations has been limited to money market experts seeking to gauge the impact on short-term interest rates. The traditional dynamic was the greater the excess cash, the lower rates would fall. But in a system already swimming in more money than it needs, bank-to-bank lending rates are now more likely to rise or fall depending on whether the refinancing operation boosts support for the euro zone's ailing sovereign bond market.
"The concept behind the three-year LTRO is not so much to support the bank funding issue as it is to support the sovereign funding issue - sovereign funding is the dog, bank funding is really the tail," said Pavan Wadhwa, global fixed income strategist at JP Morgan. The latest Reuters poll points to a demand of 492 billion euros at the long-term refinancing operation (LTRO). The first operation in December allowed banks to shore up their medium-term financing and supported sovereign bonds by encouraging banks to borrow cheaply and invest in higher-yielding Spanish and Italian debt. This time around, any demand in excess of refinancing needs is likely to be viewed as potential investment in peripheral bonds - a boon to risk markets that could, in turn, squeeze already-low interbank rates even lower.
"A big positive surprise would raise the idea that there's a lot of opportunistic behaviour by the banks and that would clearly support the liquidity-driven sentiment in the market and you would expect spreads to tighten further," said Elwin de Groot, senior market economist at Rabobank in Utrecht, Netherlands. Conversely, a below-forecast take-up could spook rates higher."What drives these interbank markets is partly the excess liquidity in the system, and there is a lot of that already; and secondly, any stress coming out of sovereign markets," Wadhwa said."Given the fact that sovereign markets are likely to underperform in the event that the take-up is poor, you would expect some degree of spillover into funding markets, but it's not going to be a dramatic impact."
WHEN THE DUST SETTLES Looking beyond the assumption that above-consensus demand would push rates lower in the first instance, analysts saw some risk that the move would not be sustained."If there's a big number it could be an initial positive reaction by the market, but then they will turn to looking at the crisis from a more fundamental perspective and whether this is enough to turn it around," de Groot said."In our view, we need more measures by European leaders to do that, so it could well lead to more negative market sentiment in the days following - even if there's a big take-up."Demand well in excess of the consensus may also raise broader economic concerns: in the first instance that banks were in worse health than the bullish market had assumed, before more structural worries come to the fore."That (knee-jerk) may move into a concern that banks might not be focusing on core business quite as much," said Peter Chatwell, rate strategist at Credit Agricole in London."Ultimately, to improve the macroeconomic environment we need banks not just to be full of funding, but looking to take real economy business opportunities."
* Euro/dollar 3-month FX basis widens, but move seen brief* Euro interbank rates hit fresh 16-month lows* Deposits with the ECB spike as expectedBy Marius ZahariaLONDON, March 2 One measure of dollar funding costs rose on Friday after ECB loans in the U.S. currency expired, but a glut of cash in the banking system should ensure a falling trend resumes. The three month euro/dollar cross currency basis swap , which measures the cost of swapping euro interest payments on an underlying asset into dollars, hit its widest in five weeks at minus 82 basis points. This follows Thursday's expiry of the ECB's first allotment of three-month unlimited dollar loans on Dec. 7, when banks took over $50 billion."The three-month dollar tender is rolling off, this is why we're seeing the move (wider) today, not because of any inherent market tensions," said UBS currency strategist Geoffrey Yu, adding that he expected the euro/dollar basis to resume its tightening trend soon.
The basis is often used as an indicator of how hard it is for European banks to borrow dollars. The cost shot up to its widest in two years at minus 167.5 bp in late November, before the ECB's first offer of cheap 3-year funding calmed market nerves about the euro debt crisis. Yu said he "wouldn't be surprised" if some European banks swapped into dollars some of the half a trillion euros they borrowed at the ECB's second three-year tender on Wednesday, but the volumes would be low. The three-month interbank dollar Libor rate fixed an touch lower at 0.47575 percent from 0.47970 on Thursday. Equivalent euro rates also fell to 0.86114 percent from Thursday's 0.87893 percent, the lowest level in 16 months, driven down by lower demand for cash after the ECB's massive injection.
DEPOSITS AT ECB RISE Most of the new money ended up back with the ECB, with overnight deposits rising to 777 billion euros from 475 billion euros in the previous day, when the ECB cash entered the system.
The increase is similar to the net additional liquidity after Wednesday's three-year cash tender, which analysts calculate at around 310 billion euros. A persistently high figure in the deposit facility would indicate that the new money is not filtering through to the real economy, as the ECB hopes. The number is, however, unlikely to offer convincing clues on how much money banks are spending on short-dated euro zone government bonds, which rallied sharply after the ECB's first liquidity tender, easing concerns about Europe's debt crisis."Even if they started selling these bonds now, the cash proceeds would still be in the system ... and will still show up in the deposit facility," said Benjamin Schroeder, rate strategist at Commerzbank."Only if somebody withdraws it from the system would you see the number falling."Lending to businesses in the real economy depends on how confident banks are that they will be able to find money in the market, rather than at the ECB, whose support is only temporary, analysts say. But their incentive to test their market access is lower now, given that the system is awash with cash. For instance, volumes used for the unsecured overnight Eonia rate fixing dropped to 24 billion euros on Thursday, compared to 32 billion euros on Wednesday and 39 billion euros on Tuesday.
* Eonia volumes drop year-on-year in January* Partly caused by dropouts from rate-setting panel* Banks also allocating more funds for longer-term lendingBy Marius ZahariaLONDON, Feb 4 Euro zone overnight bank-to-bank loan volumes shrank sharply year-on-year in January, partly reflecting signs of healing in the financial system as banks become more confident about lending longer-term. Improved longer-term access to funds in money markets is a crucial pre-condition for banks to lend more money to businesses and help the region's economy recover. Reuters data on settlements of the euro overnight Eonia rate showed the daily average volume of trades dropped to 17.37 billion euros in January 2013 from 30.47 billion in the same month of last year. Withdrawals from the rate-setting panel, including heavyweights Citi and Rabobank, in the wake of a scandal over setting interbank interest rates, contributed significantly to the drop in volumes, but are unlikely to have accounted for the entire sum, traders said.
Better economic data in the euro zone and the United States and expectations the European Central Bank would step into government bond markets if the three-year-old debt crisis escalated are encouraging banks to take more risk. That is shifting some of the money from low-risk overnight trades to longer-term maturities."The situation is improving from a curve extension point of view and the quality of names being lent to is also decreasing," one money market trader said."I've (even) seen one-year trades going through, but (most of the activity) is in the three-month and six-month sectors and volumes are picking up."
MARKET FUNDING Another sign of improved confidence in money markets could be that banks repaid a higher than expected amount in three-year loans (LTROs) taken from the ECB late in 2011, when the central bank offered unlimited cash to prevent a credit crunch. Paying back long-term loans to the ECB means banks become more reliant on the market for funds, and this may have also contributed to the extension of maturities in interbank loans.
"We have two effects. One, of course: the panel from which the rates are calculated is shrinking and some of the banks which you would expect to add more volumes to the calculation of the index have left the panel," Commerzbank rate strategist Benjamin Schroeder said."And two: at the moment we have the ... repayments of the LTROs so you have lower overnight volumes because banks extend the duration of their interbank trades to bridge the ... LTRO repayment dates."Eonia rates are calculated on a trade-weighted basis using data from the same 39 contributors that make up the panel setting Euribor, an important gauge of how much banks pay to borrow from their peers. Euribor and its London-based counterpart Libor are going through a credibility crisis as some banks have been accused of manipulating Libor rates. Several lenders have pulled out of the Euribor panel in recent months. The overnight rate last settled at 0.081 percent, comfortably within an extremely narrow range seen in the past six months. Longer-term rates rose sharply in January -- one-year Eonia rates have risen five-fold to 0.2 percent -- due to expectations ECB loan repayments could massively reduce the excess liquidity in the euro zone. The pick-up in volumes and in rates at the longer end of the money market curve can only be sustained if economic data continues to improve, traders said, and many in the market have expressed doubts that would be the case."It's only so far we can move away from fundamentals," ICAP strategist Philip Tyson said.
May 2 Short-term euro money market rates fell on Thursday after European Central Bank President Mario Draghi said the bank was ready for a move to a negative deposit rate. Draghi said the ECB was "technically" ready to cut the rate it charges banks to keep cash at the central bank overnight to below zero - a move that would effectively penalise them for hoarding cash and not lending it to other banks or businesses. He said several unintended consequences of such a move were possible, but the ECB would cope with them if it decides to act. Euribor futures rose 3-5 ticks across the 2013 and 2014 strips, indicating expectations that the benchmark bank-to-bank three-month Euribor rate - a gauge of expectations of future official interest rates and liquidity conditions - will settle at lower levels than initially thought over the period."We definitely seem to be a lot closer to going negative than markets initially thought," said David Keeble, global head of fixed income strategy at Credit Agricole.
"His (deposit rate) comments definitely set the cat among the pigeons. He was quite aggressive and had a very dovish sounding tone."Keeble did not expect Euribor futures to rise much further, saying markets were likely to wait for the next inflation data before gauging whether and when the ECB could make such a move.
OCTOBER/NOVEMBER Forward euro overnight Eonia rates dated for future ECB meetings dropped by up to 3 basis points across the same strips, with the lowest point on the curve oscillating between October and November at around 0.03-0.04 percent.
Eonia rates have traded about 8 bps above the deposit rate in recent months, meaning money markets are pricing in a slight chance of a deposit rate cut in October/November."That makes sense. The ECB still expects a recovery in the second half ... and if we don't see any signs of that by autumn we could see a move in the deposit rate," said Anders Svendsen, chief analyst at Nordea in Copenhagen. Draghi's mention of unintended consequences also suggested the ECB was unlikely to cut the deposit facility rate - effectively a floor under money market rates - any time soon. Low money market rates may reduce banks' incentive to lend to each other. Some U.S. money market funds restricted lending to European banks last year when talk first emerged about the possibility of a deposit rate cut."I guess the ECB is still afraid of draining the money market completely. It's worried about money market funds and potentially about taxing the banking system, which is one way of looking at