Commerse, Markets and Investing :: Money news

Money markets ecb rate cut bets push back to october

´╗┐Feb 10 The European Central Bank is not expected to cut interest rates again until October at the earliest, money market prices showed on Friday, as traders exited bets for a move in March after the bank gave no hint of further monetary easing any time soon. ECB President Mario Draghi on Thursday pointed to signs the euro zone economy had stabilised recently while warning of big risks to growth, which analysts took as a signal the bank would keep rates steady at 1 percent for the near term. A Reuters snap survey of 57 economists showed only 14 now think the ECB will cut interest rates by 25 basis points to 0.75 percent next month. By contrast, a regular survey last week showed 41 out of 71 analysts thought the central bank would resume rate cuts before the end of the first quarter. Calculations based on one-week Eonia rates show money markets are pricing in a 12 percent probability the bank will resume lowering its refinancing rate in October."You have rather flattish Eonia curve until October ...(which) shows the market is convinced the ECB will continue to carry out its unconventional measures but will not move on the refi rate or conventional policy," said Matteo Regesta, a strategist at BNP Paribas. Economists at RBC Capital Markets said they were no longer expecting further rate cuts from the ECB, reversing their call before Thursday's ECB meeting for further monetary policy easing in coming months.

The ECB's emphasis on some tentative signs of stabilisation in economic activity was consistent with maintaining an expansionary monetary policy, they said."But the diminishing stresses in financial markets and the banking system will probably do enough to ease monetary and financial conditions to enable the ECB to avoid crossing the 1 percent level," they said in a note.

CASH MANIA Interbank lending rates kept up their downward trend on Friday after Draghi urged banks to make use of the generous long-term liquidity the central bank will offer later this month. The ECB also approved an expansion of the type of collateral it accepts at its liquidity operations, which could see banks snap up three-year funds on offer on Feb. 29 after they took up nearly half a trillion euros of the first loans in December.

With expectations of the uptake for the February round matching or even exceeding December's demand, downward pressure on lending rates in the money market remains intense. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.063 percent, the lowest level since late January last year. Equivalent London offered interbank rates fixed at 0.99157 percent, its lowest in just over a year and down from 0.99943 percent. Signs of money market stress have also been abating, with the trend set to continue barring Greece tipping into a chaotic default after its efforts to secure a second bailout hit another glitch on Thursday. The spread of three-month euro Libor over OIS or anticipated central bank rates, tightened two basis points to 64 bps on Friday, down from over 90 bps hit in early December."As long as the mania about the ECB liquidity continues and with an accident in Greece being averted for now, there is no point in taking the other side and we expect spreads to come in further, both in spot and forward terms," Commerzbank strategist Christoph Rieger said.

Money markets short term us yields low as policymakers could act

´╗┐Short-term U.S. debt will likely be rangebound in coming sessions on expectations that global policymakers will keep interest rates low to help spur sluggish economies and keep the euro zone intact. European Central Bank President Mario Draghi is said to be holding talks with other council members on new ECB measures, according to Bloomberg. The news sent riskier assets such as equities higher around the world as analysts saw policymakers pushing to keep the monetary union together even as the region's debt crisis threatens to engulf larger economies in the zone. But prices on Treasury bills didn't seem to react, with 3-month, 6-month and 1-year bills unchanged."The fact that the front end of the market is unwilling to break its recent range is not that surprising," said Ian Lyngen, a senior government bond strategist with CRT Capital.

Any measures that Draghi might take would keep downward pressure in front-end rates, Lyngen said. Those measures could include another long-term refinancing operation. In two previous operations, the ECB pumped about 1 trillion euros into the banking system. Also said to be under consideration would be more bond buying or another interest rate cut.

New steps from the U.S. Federal Reserve would likely result in the same pressure on short-term rates. The FOMC meets next week, and analysts have speculated that the bank could engage in more easing at some point this year as the recovery in the U.S. economy - the world's largest - remains tepid. Data on Friday showed that U.S. economic growth slowed in the second quarter as consumers spent at their slowest pace in a year.

As a result, Lyngen said, short-term yields could simply trade sideways in coming sessions, with investors unwilling to budge from the current low rates. Three-month Treasury bills yielded 0.107 percent, and six-month bills 0.147 percent. Both were unchanged in price from Thursday. Benchmark three-month dollar Libor slid to 0.44660 percent, its lowest level since early November. In the derivatives market, the spread between the two-year U.S. interest swap rate and two-year Treasuries narrowed to 20.5 basis points, the narrowest in about a year, suggesting traders see chances of more Fed stimulus would help the banking system. Two-year interest swaps are seen as a proxy for bank credit risk.