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Money markets ecb rate cut bets pared, still on the table

* Short-term rates inch higher after Draghi speech* Markets still discounting ECB rate cuts in 2012* Bets may pile up again if Spanish, Greek worries remainBy Marius ZahariaLONDON, June 6 Short-term euro zone interest rates rose slightly on Wednesday after the European Central Bank failed to flag it was ready to ease monetary policy, but markets are still pricing in a large probability the bank will cut rates later this year. The ECB kept its refinancing rate unchanged at a record low of 1 percent and the deposit facility at 0.25 percent and President Mario Draghi warned his bank cannot make up for other institutions' lack of action. This disappointed markets, which had expected him to at least send out a signal that more easing was forthcoming."From the tone of it, as of today we cannot expect any significant measure in July because he looked very defiant and imperturbable - the ball is very much in the court of the politicians," BNP Paribas rate strategist Matteo Regesta said. However, rate cut bets have not been taken off completely.

Regesta estimated that the forward overnight euro zone interbank EONIA rate markets - which moved 1-3 basis points higher across the 2012 curve after Draghi's speech - was still pricing in 24 percent probability that the deposit facility rate will be slashed in half in July. For the end of the year, a December EONIA of just over 23 basis points discounted a 66 percent probability of that happening, compared to some 80 percent at the end of last week. Euribor futures also sold off a few ticks after Draghi's speech, implying expectations for higher fixings of three-month Euribor rates in the future. The December Euribor contact was 3 ticks lower on the day and also compared with levels seen earlier in the session at 99.43, implying a 0.57 percent Euribor fixing in the last month of the year versus Wednesday's 0.663 percent.

After May's ECB meeting, which also disappointed markets waiting for more central bank easing, the December contract sold off to as low as 99.29, but it was bought back in the past few days as rate cut bets have been put back on the table. Analysts say the same thing could happen next month if the conditions that led to speculation the ECB could cut interest rates on Wednesday are still in place. Tensions over Spain's stricken banking sector are rising and the risk that Greece could leave the euro zone after its June 17 election is perceived as high. This is hampering business sentiment and growth potential even in the euro zone's powerhouse Germany, as shown by recent data, strengthening the case for the ECB to act."(A rise in ECB easing bets) could happen again, it depends on developments in Spain - if they get help, how large recapitalisation needs for the banking system are," said Commerzbank rate strategist Benjamin Schroeder.

"Also there is no clear indication what the outcome (of the Greek election) would be.""VERY DYSFUNCTIONAL" Moody's cut the credit ratings of six German banking groups and Austria's three largest banks on Wednesday, giving a glimpse of how far the ramifications of a potential Greek exit from the euro zone might go. Banks more than tripled their uptake of ECB dollar funding on Wednesday, the latest indication that some are finding it increasingly hard to source cash in the market. Traders say three weeks is the longest period for which most banks are willing to lend in cash markets, and that's only to a select group of counterparties, also because they are dressing their books for the half-year turn. In his post-meeting remarks, Draghi himself described interbank markets as "very dysfunctional".

Money markets key interbank lending rates ease

* 3-mo Libor rate eases* 3-month euro/dollar cross currency basis swap narrows* U.S. money funds bank more aggressively on EuropeBy Ellen FreilichNEW YORK, March 21 After pricing out some of the expectations for a third round of quantitative monetary easing, some U.S. interest rates eased a bit on Wednesday, but in the interbank lending market, three-month Libor eased after having been flat for several days. The benchmark three-month London Interbank Offered Rate (LIBOR) fixed at 0.72357 percent on Wednesday, down from 0.73214 percent on Tuesday. The three month euro/dollar cross currency basis swap , another gauge of dollar funding risk, narrowed to minus 58 basis points, the tightest in nine months.

The measure, which widens in times of funding stress when investors compete for dollars, has gradually tightened from November's minus 167.5, a level not seen since the aftermath of Lehman Brothers' collapse in late 2008. The relaxation was said to be tied to good economic data, especially from the United States, and optimism among some investors about euro zone sovereign debt. Three-year loans from the European Central Bank (ECB) have also contributed mightily to alleviating worries about counterparty risk. After a week of mainly adding risk, investors tried the reverse tack on Wednesday with global stocks drifting lower and safe-haven government debt prices rising. Last month, however, the latest period for which data was available, figures on taxable money funds showed those funds ready to participate a little more aggressively on Europe.

Money fund holdings of French bank deposits, commercial paper and repo increased by 14 percent, returning to their October level. Since these holdings troughed in December, French bank exposures have increased by 72 percent, but are still half what they were in May 2011, said Barclays Capital market analyst Joseph Abate."After reducing their exposures too far, money funds appear to be looking for a 'happy medium' between the two extremes," he said.

Scandinavian, German, and UK holdings by money market funds were largely unchanged in February. Weighted average maturities of money fund European bank exposures also lengthened in February, consistent with overall market "risk on" sentiment, Abate said. As firms lock in low rates by borrowing for longer periods, the weighted average maturity on commercial paper outstanding has lengthened to 47 days from 39 in September, he said. As interbank lending rates have eased, money fund investors looking for returns benefited from increases in overnight repo rates from January's single-digit basis points to the low teens to mid-20s. The rise in repo rates combined with managers' willingness to extend average maturities has contributed to a marginal rise in money market yields, analysts said."Clearly, investors and businesses are growing more comfortable with the course of events, not just in the United States, but in Europe," Deborah A. Cunningham, chief investment officer for the taxable money markets and senior portfolio manager at Federated Investment Management Company, wrote in an analysis published earlier this month."On an historical basis, the current inflation rate combined with improving economic fundamentals would indicate the federal funds target rate easily could be 1 percent, or even 2 percent, and still be considered very accommodative," she said. "Indeed, in any other environment, a 1 percent target funds rate would seem extremely low. Now, it would seem like nirvana."

Money markets markets stick to rate cuts bets after ecb

May 3 Money markets stuck to expectations of a rate cut this year after the European Central Bank on Thursday neither signalled further monetary easing nor eliminate the possibility of more stimulus. At a press conference in Spain, Draghi painted an uncertain picture of the euro zone's economy, saying while it was likely to improve this year there were risks of a decline. He said more time was needed to see the impact of cheap 3-year financing on the real economy and that any exit strategy remained premature. Euribor futures gave up gains after the comments, as traders took profit on previously held positions. But by late trade, they had come off their lows as some bought back into the dips."They kept their options opened but they didn't give really any indication, and they don't appear to be in any hurry to change policy," Nikolaos Panigirtzoglou, strategist at JPMorgan said. Data this week painted a bleak picture of the manufacturing sector in the euro zone, while double-digit unemployment fueled concerns that austerity in Europe was choking an already sluggish economy. Euribor interest rate futures fell as much as 3.5 ticks across the 2013 and 2014 strip after Draghi's comments having traded as much as 2 ticks higher when the press conference started.

By late trade, Euribor futures had come off their lows although they were still 0.005 to 2 bps lower on the day. Alessandro Giansanti, strategist at ING said, said the June contract was pricing in a close to fifty percent chance of a 25 basis point that month, little changed compared to before the press conference.

DETERIORATING BACKDROP One trader said the worsening economic situation in the euro zone had money markets players betting on more monetary easing from the ECB, be it via a cut in interest rates, in the deposit facility rate or by increasing the maturity on long-term refinancing operations. The ECB injected one trillion euros worth of cheap 3-year cash in December and February, providing highly indebted countries with some breathing space as the excess liquidity helped limit a rise in peripheral bond yields.

"The reaction was fairly predictable in that people are happy to be long of Euribor futures and as a result, because nothing happened today, the pull-back was bought quite quickly," said the trader."Today's press conference probably didn't surprise us in that nothing happened in terms of changing the monetary stance, but they certainly didn't close any doors."Eonia forwards were suggesting that the overnight rate be at 0.29-0.24 by November compared to 0.34 percent currently. The trader said that suggested a 30 percent chance of a 25 bps interest rate cut by that time. But Panigirtzoglou said the Eonia rate also indicated the high probability of a cut in the rate of the deposit facility currently priced in by the market, little changed from before the press conference."I think the expectation for an ECB cut and a cut in the deposit facility will stay for as long as there is funding stress and the economic headwinds remain as intense as they are," Panigirtzoglou added.

Money markets pricing in higher chance of ecb deposit rate cut

* Draghi says ECB discussed deposit rate cut below zero* July, August Eonia rates turn negative* Deposit rate cut still not base case scenarioBy Marius ZahariaLONDON, Dec 6 A closely-watched money market indicator of European Central Bank interest rate expectations turned negative on Thursday after President Mario Draghi said the bank discussed a cut in the deposit rate. The ECB left its key refinancing rate and the deposit facility rate unchanged at 0.75 percent and 0 percent, respectively, but depicted a bleak outlook for the euro zone economy next year, cutting growth projections. Draghi said a deposit facility rate cut into negative territory was discussed at the meeting, a slight change of tone since he described such a move as "uncharted waters" earlier this year.

Creating negative deposit rates -- effectively charging depositors rather than paying them interest -- is a way of forcing banks to put their money to work elsewhere. Forward Eonia rates, derivative financial contracts used by investors to bet on where the euro interbank overnight rate will trade at certain points in the future, dropped 2-4 basis points across the 2013 strip during Draghi's speech."He was fairly dovish on the outlook for rates, all the forecasts are pretty low, it was a very dovish speech overall," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.

The deposit rate is considered a natural floor for Eonia rates as the risk of parking money overnight at the ECB is perceived to be much lower than at a commercial bank. The Eonia rate forwards dated for the July and August ECB meetings next year briefly turned negative, falling as low as minus one basis point. This compares with a 6.9 basis point settlement of the spot Eonia rate on Wednesday. HARD TO JUDGE

The vast liquidity made available to banks by the ECB and the uncommon sight of negative Eonia rates make it hard to judge what is the precise probability markets attach to the prospect of a deposit facility rate cut. But the small difference between spot and forward Eonia rates makes it "reasonable" to say markets still think a 25 bps cut is less likely than leaving rates flat, Keeble said. Vincent Chaigneau, head of rates strategy at Societe Generale in Paris, said the market priced in a "significant" probability of a deposit rate cut, but added:"If they

Money markets shorter term funding measures rise on greece

NEW YORK, May 15 Some shorter-term funding markets are reflecting rising strain in bank borrowing rates as concerns of a Greek exit from the euro increase, although funding costs remain below levels reached late last year. Europe's debt crisis has flared up on risks Greece could exit the euro zone. At the same time, Moody's Investors Service is conducting credit rating reviews expected to lead to widespread downgrades of regional and global banks. That is expected to increase some funding costs and send some subordinated bank bonds in Europe into junk territory. "There has been heightened risk in slightly longer term funding," said Ira Jersey, an interest rate strategist at Credit Suisse in New York. He noted that concerns are reflected "on a forward basis, not really now." Two-year interest rate swap spreads, a proxy for bank counterparty risk, reached their widest since January 10 on Tuesday, widening three quarters of a basis point to 38.25 basis points. The spreads have widened from 27.75 basis points at the beginning of May. The Libor-OIS spread, or FRA/OIS spread, for contracts that mature in early 2013 also rose to 50.2 basis points, up from 49.3 basis points on Monday and an increase from 41.6 basis points a week ago. This spread is seen as a gauge of banks' reluctance to lend. Other short-term funding indicators were relatively stable as central bank loan operations continue to support banks for the near term. The European Central Bank has loaned over 1 trillion euros in three-year loans to banks as part of its Long Term Refinancing Operation (LTRO). The liquidity injection has eased much of the funding concerns that hurt banks late last year. "Banks in Europe still have a ton of cash held over from the LTRO so it's not like there are a lot of funding needs, so therefore the risk of a near term default," said Jersey. The three-month London interbank offered rate was unchanged on Tuesday at 0.46585 percent, down from 0.46685 percent late last week.

Money markets swaps spreads tighten, libor falls on ecb hopes

NEW YORK, July 31 Two-year interest rate swap spreads have rallied to their tightest levels in a year and the three-month dollar London interbank offered rate dropped to its lowest since November on Tuesday. The moves happened on increased expectations that the European Central Bank will cut interest rates, which in turn will reduce bank borrowing costs. ECB President Mario Draghi said last week the ECB would do "whatever it takes" to stem the region's spreading debt crisis, spurring expectations that the central bank will implement a bond purchase program at Thursday's policy meeting. The ECB is also seen as mulling another rate cut, though some see the central bank as more likely to wait as it assesses the impact of its July cut to a record low 0.75 percent. "There are broad expectations of an ECB rate move and possibly more liquidity or bank lending moves that should lower (borrowing) costs for European banks," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. Some investors are also expecting the U.S. Federal Reserve could follow the ECB in cutting the interest rate it pays on bank reserves, which has helped send two-year Treasuries yields down by a third in the past month. The Fed will give the official statement from its two-day meeting on Wednesday. Two-year swap spreads, which are a proxy of bank credit risk and reflect future expectations of interest rates , have tightened to 19.50 basis points from 23.50 basis points early last week, before Draghi's comments. The spreads have rallied from a recent wide of 38.50 basis points in May. The cost that banks report that they can borrow three-month unsecured dollars loans from each other has also fallen to around 44 basis points from 45 basis points early last week and around 47 basis points in mid-to-late June. Among the banks posting the largest drops in the Libor panel, JPMorgan cut its reported borrowing rate to 34 basis points from 35 basis points early last week and from 42 basis points at the beginning of the month. Credit Suisse has also cut its reported rate to 36.5 basis points from 39 basis points early last week, and from 41 basis points earlier this month. British bank Lloyds cut its rate to 43 basis points from 45 basis points earlier last week, and from 50 basis points at the beginning of the month. Barclays, by contrast, has increased its rate to 39 basis points from 34 basis points early last week. Barclays has been at the center of the Libor scandal that is expected to bring scrutiny to other banks on the Libor reporting panel. Barclays agreed last month to pay fines to U.S. and British regulators to settle charges that the bank reported false rates in order to benefit its trading positions and disguise its rising borrowing costs during the 2008 financial crisis.