Financial industry, Commerse and Money :: World finance

Money markets one year eonia rates head towards negative territory

* Eonia rate closes in on zero on deposit rate cut bets* Off day's lows as ECB policymakers downplay Draghi comments* One-year Eonia rate seen testing record lowsBy Ana Nicolaci da CostaLONDON, May 3 The average cost of overnight borrowing in euros for a year fell close to zero on Friday and could dip into negative territory after the European Central Bank hinted it was open to deposit rate cuts. Eonia rates fell to their lowest since December 2012 a day after ECB President Mario Draghi said the central bank was "technically ready" and open-minded with regards to a cut in the deposit rate and stood ready to act if needed. They came off those lows as ECB officials downplayed the market reaction to Draghi's comments, but analysts said one-year Eonia rates would likely test record lows hit in December 2012.

ECB Governing Council member Erkki Liikanen said there was nothing different in Thursday's discussion about deposit rates. Fellow policymaker Ewald Nowotny said the possibility of a deposit rate cut was not relevant for now, although he later sought to soften those comments."As long as the market continues to price the possibility of negative deposit rates, as they started to do after yesterday's comments ... I expect Eonia rates in medium-to-long term maturities to remain low," said a fixed-income strategist at a London-based bank who asked not to be named."Last December the market was pricing in negative depo rates. So I would say that markets could move to the same level."

One-year fixed-term Eonia rates, which reflect the expected average cost of overnight borrowing over the life of the contract, fell as far as 0.001 percent - its lowest since mid-December. It came off those lows to 0.04 percent, but analysts said it could well test record lows of -0.037 percent hit on Dec. 7 in the near-term. The Eonia curve was inverted, with one-year rates lower than the Eonia overnight borrowing rate, which last stood at 0.078 percent.

Alessandro Giansanti, senior rate strategist at ING, also said one-year Eonia rates could fall as far as -0.05 percent after the ECB's comments the previous session. He said the ECB was trying to prevent money market rates from rising, as the repayment of ECB crisis loans squeezed excess liquidity in the financial system. Excess liquidity last stood at 313.3 billion euros, not far from 200 billion, the level at which market rates have historically tended to start rising."I am not sure that they will decide to decrease the deposit facility to negative levels, but if the situation will not improve on the macro side, I think they will do more easing," Giansanti said. "We are going towards a period of very subdued Eonia rates."Two-year fixed-term Eonia rates also fell to their lowest since December last year at 0.026 percent earlier but were last at 0.063 percent.

Money markets rates sink as ecb repayment flood slows to a trickle

Feb 1 A rapid rise in euro money market rates came to an abrupt halt on Friday as the initial flood of crisis loan repayments to the European Central Bank shrank to a trickle. Having paid back, at the first time of asking, over a quarter of the 489 billion euros ($664 billion) handed out in the ECB's first round of 3-year LTRO loans, banks will return only 3.4 billion next week. Money market traders polled by Reuters at the start of the week had predicted a 20 billion euro repayment and the much smaller return, after the initial 137 billion euro payback, left many rethinking how quickly the excess of cash in the system would return to a more normal level. One-year Eonia rates fell below 0.195 percent for the first time this week, having been as high as 0.243 percent before the repayment was announced. The euro also dipped. The one-year Eonia rate reflects what overnight bank-to-bank lending rates are expected to average out at over the year, and has already risen 0.25 basis points -- the equivalent of a typical ECB interest rate hike -- since December."It's fair to say that banks put on a good show last week, surprising the market with the volume of cash handed back to the ECB, but this was likely a one-off," Icap strategist Chris Clark said.

"The road back to normalisation of euro money markets will be a very long and slow one."The weekly repayments are gaining increasing market attention, both because of the jump in interbank rates and because they are being seen as a proxy of banks' health and ability to survive without central bank help. They have another two years to pay back the money and can repay as little or as much as they want each week, but returning the cash is increasingly being seen as a badge of honour to be waved at rivals, rating agencies and shareholders.

Credit Agricole was the latest bank to say it had started repaying its LTRO funding on Friday and its in-house strategists said the small overall weekly number would prompt the market to revert to its original view that the pattern of repayments would be steady rather than sudden. They expect Eonia rates for one-year and beyond "to gradually rise - hence, normalise towards the refi rate - while the shorter-dated tenors, particularly up to the six-month tenor, should have scope to fall modestly from current levels," they said in a note. The effect of the liquidity withdrawals has been greatest on longer-dated money market rates because the excess of cash is large and not expected to fall to 'normal' levels for some time.

For Europe's struggling debtor countries and the ECB, the jump in banking market rates is not ideal because it effectively tightens money policy and creates unwanted stress just when the bloc's economies are showing fragile signs of improvement. The loans, which banks can keep for up to three years, were designed to stop lending freezing up after its sovereign debt crisis spiralled in 2011. Influential ECB Board member Peter Praet demonstrated the central bank's sensitivity to a too-rapid withdrawal of liquidity earlier this week."We will exert vigilance to ensure that ... the overall liquidity conditions prevailing in the money market will remain consistent with the degree of accommodation that the current outlook for prices and real activity warrant," Praet said. Market analysts will now focus on the ECB's monthly policy meeting next week before switching the bulk of their attention to Feb. 22 when the ECB will announce how much banks want to instantly repay of the second 530 billion LTRO