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Money markets ecb deposit rate cut priced by markets seen unlikely

* Markets still price for cut in ECB deposit rate* But analysts see cut to zero unlikely* Could have detrimental effect on short-term marketsBy Kirsten DonovanLONDON, May 4 Markets are pricing in a cut in the rate the ECB pays banks to deposit funds overnight as a faltering euro zone economy raises expectations of further policy easing, but such a move may have a detrimental effect on financial institutions and short-term lending markets. The European Central Bank on Thursday neither signalled further monetary easing nor eliminated the possibility of more stimulus despite bank President Mario Draghi noting the uncertain picture for the euro zone economy. BNP Paribas calculates that markets are pricing in a 1-in-4 chance of a 25 basis point cut in the deposit rate - which banks receive when they park cash with the ECB - taking it to zero percent, or a 1-in-2 chance of a 12.5 basis point cut. This compares to a 33 percent and 66 percent implied probability prior to Draghi's press conference. The projections are based on the Eonia overnight indexed swap rate - a measure of future expectations for overnight market lending rates - at the time of December's ECB policy meeting. This is currently priced at around 27 basis points, around 7 basis points below current Eonia (interbank overnight) fixings, implying some measure of cut.

"A cut in the deposit rate could potentially stimulate banks to lend to the wider economy, but zero percent seems unlikely at this juncture," said RBS rate strategist Simon Peck."Markets have moved towards pricing a cut, and could go further with that, but whether it happens or not is another matter."The bank thinks the December overnight rate could fall further, to 20 basis points, as the market prices in a higher probability of a deposit rate cut, but analysts think it is unlikely the ECB's deposit rate would fall to zero."If they were to cut to 12 or 15 bps they're not forcing the banks to lend, it's more of gentle push. But if the deposit rate goes to zero it's a very different game," Peck added.

The ECB has pulled out all the stops to help the banking sector as investor and counterparty confidence crumbled with the escalation of the euro zone debt crisis on concerns over exposure to sovereign debt. The central bank's latest move was to pump over a trillion euros of three-year funds into the banking system, a notable step up in its policy to provide unlimited low cost funding. Banks are currently paid 25 basis points if they deposit money at the ECB overnight, a no risk option. If the rate is cut to zero this option disappears. Around 800 billion euros is currently being parked there and even though Draghi has said that it is not the same banks borrowing cash from the ECB as depositing it overnight, those banks that are keeping money at the ECB would lose income unless they were prepared to risk lending the money on.

"(Cutting the rate to zero) wouldn't really be in the spirit of what the ECB has been trying to do," said Credit Agricole rate strategist Orlando Green."It doesn't seem consistent, it might even be counter productive."Indeed, there are small signs that banks are being encouraged to lend anyway after the central bank's two three-year funding operations. The ECB's lending survey released last week showed banks expect to end the recent trend of tightening the rules for companies to obtain credit, although small and medium sized firms were struggling to get funding. Commerzbank rate strategist Benjamin Schroeder also said a cut in the deposit rate could have a knock-on effect on money market trading volumes and other shorter-term lending markets, such as the repo market."The "better" banks can still obtain funds from banks that have no recourse to the deposit facility at rates lower than the deposit rate. They then deposit the money at the ECB," he said."Those trades would vanish and the effect on turnover in money markets would be detrimental with no prices for short-term liquidity."

Money markets interbank rates fall on bets of cbank stimulus

* Three-month sterling Libor falls further after minutes* Euribor rates within whisker of record lows* Cut in ECB deposit rate seen more likely than refi rateBy Ana Nicolaci da CostaLONDON, June 20 Interbank lending rates in sterling and in euros continued to fall on Wednesday on growing expectations of further support from major central banks around the world to counter the fallout from the euro zone's debt troubles. The Bank of England looked to be close to launching a new round of monetary stimulus because of the worsening euro zone crisis, according to minutes of its last policy meeting, which showed officials split 5-4 on the move, with Governor Mervyn King in favour. The minutes helped take three-month sterling Libor to its lowest since September 2011, after the rate tumbled last week when the BoE announced a raft of measures to boost liquidity in the banking system and hinted that more quantitative easing gilt purchases could be on the cards. Three-month Euribor rates were only a whisker away from record lows after recent comments from European Central Bank officials prompted markets to price in the possibility of more rate cuts."Barring a massive rebound in retail sales tomorrow and better PMIs, above all, I think the market is going to be heavily discounting more QE (quantitative easing in the UK) in July," Ma r c Ostwald, strategist at Monument Securities, said.

"For the euro zone, I think really the jury is still out ... The talk that ... reducing the deposit rate to zero is no longer a subject which is a taboo at the ECB, would seem to suggest that a few people will be looking for the ECB to cut rates in July. But what difference that's going to make (I don't know)."ECB policymaker Ewald Nowotny said earlier this month the bank has the ability to cut interest rates if the euro zone economy continues to deteriorate and could even slash the rate that controls money market rates to zero. That along with recent comments from ECB President Mario Draghi that the euro zone economy faces serious risks and no inflation threat has heightened expectations the ECB could cut interest rates or take policy action soon. Reflecting this sentiment, three-month Euribor rates traded at 0.657 percent, unchanged from the previous day's level which was the lowest since April 2010. Euribor rates hit a record low of 0.634 percent in March of that same year.

Three-month sterling Libor edged lower to 0.91775 percent from 0.92150 percent the previous session, after a sharp fall last Friday. DEPOSIT RATE CUT Eonia forwards showed that markets were expecting the Eonia overnight rate to trough at between 0.224 percent and 0.174 from August, suggesting the market was discounting some possibility of a deposit rate cut.

The rate offered by the ECB's deposit facility is 0.25 percent and is seen as a floor for overnight Eonia rates which last traded at 0.33 percent."A deposit facility rate cut is (what the market is) expecting now. If you look at where money markets are trading, it's now expecting Eonia fixings below the 20 basis points level, 15 bps below current Eonia fixings. That would only be possible with the cut of the deposit facility rate," Benjamin Schroeder, rate strategist at Commerzbank, said. It was hard to gauge market expectations for a deposit rate cut because the ECB could opt for a smaller reduction to say 0.125 percent or a bigger cut to zero percent, he said. But the market was pricing in a 40 percent chance of a deposit rate cut to zero percent in July and a 50-60 percent of this happening in August, he added. The reading varied widely between analysts. Simon Peck, rate strategist at RBS, said the market was pricing in a 25 percent chance the ECB would cut its deposit rate to zero in September and only an 8 percent chance of such a move in July. The Federal Reserve on Wednesday may also opt to launch a new round of monetary stimulus.

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 investors cautious as moodys reviews banks

* Money funds wary on bank debt amid Moody's review * Investors prefer bank debt due in 1 month or less * U.S., Freddie sells bills at higher rates By Richard Leong NEW YORK, Feb 27 U.S. money market investors have sought to reduce their risk in major global banks and securities firms after Moody's said it launched a credit review of the institutions. Borrowing costs for the 17 banks and securities firms could rise if Moody's were to downgrade its ratings because of their creditworthiness due to fragile funding conditions, tougher regulations and other issues. Some investors, in particular regulated U.S. money market funds, would not be allowed to buy debt issued by banks if they were to lose Moody's top-notch "P-1" short-term rating or their long-term debt ratings were lowered, analysts said. "There's some talk about that in the market. That's being monitored," said Jill King, senior portfolio manager at Horizon Cash Management LLC in Chicago, which oversees $2.5 billion. J. P. Morgan estimated 58 percent of all U.S. money market funds are rated by Moody's, with combined assets of $1.4 trillion as of the end of January. The funds under review by Moody's owned about $76 billion worth of debt from 11 institutions, which face a possible downgrade to P-2 from P-1. Those firms include UBS AG, Citibank, Bank of America, Lloyds TSB Bank ; Royal Bank of Scotland plc ; Swedbank AB ; HBOS plc which is part of Lloyds; Danske Bank ; Royal of Scotland NV; Goldman Sachs and Morgan Stanley. "Although $76 billion is not a trifling sum, for each of these issuers facing the possibility of a downgrade to P-2, the amount of funding exposed to potential rating action is less than 1 percent of total liabilities," J. P. Morgan said in a research report published on Monday. The money market industry's assets under management total about $2.6 trillion. Until Moody's completes its ratings review, investors prefer to stick with shorter-dated debt maturing in a month a less from the banks and securities firms. "The maturities of what investors are looking at have shortened a bit," said David Sylvester, head of money markets at Wells Fargo Fund Management in Minneapolis, which oversees about $400 billion in assets. The weighted average maturity on debt securities held among prime money market funds is about 61 days, J. P. Morgan said. In addition to less demand for longer-dated bank paper, J. P. Morgan said the Moody's review could eventually stoke more safe-haven flows into U.S. Treasury and agency bills and limit the decline in interbank lending costs. Three-month dollar-denominated Libor was fixed at 0.48910 percent on Monday, the lowest since mid-November. U.S. BILL RATES CLIMB Despite concerns about bank downgrades and Europe's debt crisis, the bidding for new supply of U.S. Treasury and agency bills came in lower than expected on Monday, analysts said. Some analysts attributed weaker demand for T-bills and agency bills to more supply and higher rates offered in the competing repurchase agreement (repo) market. Investors could earn 0.18 percent on an overnight loan in the repo market on Monday, up from 0.14 percent on Friday and above what they could earn on new three-month and six-month bills offered. On Monday, the U.S. Treasury sold $33 billion of three-month bills at a high rate of 0.115 percent, which was the highest since August 2011. The ratio of the amount of bids submitted for the three-month offering size was 4.24, the lowest in two months. The bid-to-cover ratio of Monday's $31 billion six-month bill auction came in at 4.32, the lowest in about a year. The latest six-month T-bills sold at a high rate of 0.145 percent, the highest since August 2011. Freddie Mac sold a combined $2.50 billion in one-month, three-month and six-month bills at higher interest rates than last week.

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Money markets signs of stress emerge behind ecb cash shield

* Cheap ECB loans seen as reliable shield against Greek mess* Rates still falling, but trading becomes more "name specific"* Some small signs of interbank stress show upBy Marius ZahariaLONDON, Feb 16 The hefty amount of cash floating around in the euro banking system is generally offsetting fears that a potential messy Greek default could severely hit lenders across the bloc, but tentative signs of stress in the interbank lending market are emerging. Worries that Greece may not get a second bailout are making banks more reluctant to lend to each other again, with traders saying bank-to-bank lending has turned even more "name specific" in recent days, meaning only the strongest banks were active. Benchmark interbank rates continued to fall, with the European Central Bank's injection of nearly half-a-trillion euros into the banking system last year providing comfort. Banks can also take as much of the extra cheap loans as they want at a similar tender at the end of the month. But some signs of stress can still be spotted.

The Markit iTraxx index of credit default spreads for European senior financials - measuring the cost of insuring against a bank defaulting on its debts - has risen by almost 50 basis points in the past 10 days to above 240 bps. But it was still more than one full point below the highs seen in November before the ECB first announced its three-year funding plans."The chance of a liquidity squeeze has been (lowered) but you cannot fully neglect the chance of default from a bank which has exposure to a peripheral country, not only to Greece," said Benjamin Schroeder, rate strategist at Commerzbank."Interbank risks are obviously increasing. If you think contagion can get out of hand problems in interbank markets could (appear) again."

He also said spreads between forward rate agreements and overnight index swaps (OIS)-- a widely used measure of stress in the interbank lending markets -- could re-widen if Greek tensions increased. Morgan Stanley strategist Elaine Lin said the euro Libor/OIS spread, now at 62 basis points, could expand towards 100 bps in case of a disorderly default, levels last seen in early 2009 after the shock of the Lehman Brothers collapse. Another stress measure that is widely used, the cost of swapping euro interest payments on an underlying asset into dollars as measured by the three-month cross currency basis swaps, widened by 4 bps to minus 79.5 bps.

That is still less than half the levels seen in November and some of the widening presure in cross currency markets may also have been triggered by expectations that the Dutch State Treasury may want to swap some of the around $3 billion worth of its first dollar bond being sold on Thursday into euros. ENHANCED FIREWALL Interbank rates maintained their downward trend. The three-month London Interbank Offered Rate for euros, or Libor , dropped to 0.96821 percent on Thursday versus 0.97821 percent on Wednesday. Equivalent Euribor rates also fell"Contagion will be higher in a blowout scenario," Lin said, adding that markets are still expecting the Greek situation to be dealt with in an orderly fashion."But the fact that the ECB is doing the (three-year lending) and the fact that we are at a juncture of doing another one or even the likelihood of an outright QE (quantitative easing) tends to enhance the firewall."As long as a chaotic default is not the main scenario the impact on money markets should be minimum, because "banks' balance sheets have almost written down the entire Greece holdings and U.S. exposure has wound down to minimum", she said.

Money markets stress indicators edge higher on greece concerns

* FRA/OIS spreads, euro/dollar FX swaps widening * Markets wary of Greece, but no panic yet as ECB loans help * But impact of potential Greek euro exit unknown By Marius Zaharia LONDON, May 9 The election of mainly anti-austerity politicians in Greece has pushed some euro zone money market stress indicators higher, although there was no sense of panic as most banks have already secured the cash they need for this year. Politicians who back the reforms agreed with Greece's international lenders have failed to form a government, and the political deadlock raises the risk of a full-blown Greek default next month and, some say, a potential euro zone exit. With the exact consequences of such an unprecedented event hard to predict, some closely watched interbank stress indicators have started to tick up. The difference between forward rate agreements (FRA) and overnight index swaps (OIS) - one way to focus in on counterparty risk - has risen across the curve this week. Longer-term maturities have risen more than short-term ones. Markets saw little risk of banks facing liquidity problems in the near term, as they have borrowed a total of about 1 trillion euros in long-term loans from the European Central Bank. The two-year spread was about 37 basis points, compared with 32 at the end of April. "Speculative positions in funding markets have been increasing in the last week or so and they should continue to put widening pressure on spreads like FRA/OIS and cross currency basis," said Max Leung, a rates strategist at BofA Merrill Lynch Global Research. "The real concerns (surrounding Greece) are not on the banking sector yet. In addition, there are still plenty of measures that the ECB and the Fed have in place that are shielding the banking sector from the political uncertainty." The Markit iTraxx index of default insurance for European senior financials hit its highest since mid-January on Wednesday at 268.94 basis points. That was still 100 bps lower than the highs hit before the ECB's cash injections. CROSS CURRENCY Another widely used gauge of interbank stress, the three-month euro/dollar cross currency basis swap , hit its widest levels in two weeks at minus 52 basis points. The measure, which widens when banks find it harder to borrow dollars, has been on a steady narrowing trend since the ECB's first liquidity injection in the banking sector late last year. This week, however, it has widened by 6 basis points. "There has been a little bit of movement, but there's nothing yet to suggest significant changes are taking place," said Ian Stannard, head of European FX strategy at Morgan Stanley. Stannard said the Greek political situation and uncertainties related to a broader increase of support for growth-oriented measures rather than austerity across Europe was behind the widening. But a break to levels wider than minus 60 basis points was needed to confirm a change in the overall trend, he said. "At the moment the basis is reflecting some of the uncertainty but nothing more than that." A Greek default in itself would have limited impact on the banking sector outside Greece, analysts say. Some Greek banks may lose access to the ECB's emergency liquidity measures as a result. But other banking systems have mostly written down their Greek holdings and would still be able to tap ECB funds if needed. If it becomes more apparent that Greece is heading towards a euro exit, however, stress is likely to increase sharply, as the exact consequences on the euro zone banking system are unknown. "Another Greek default may not be a Lehman-type event, but a potential Greek exit could be," BofA Merrill Lynch's Leung said.