Euro lending rates up, ECB tender in focus

By William James

LONDON (BestGrowthStock) – Interbank euro Libor lending rates pushed higher for a 16th straight session on Monday with demand for unsecured cash growing as markets were seen reducing their dependence on European Central Bank funding.

The three-month London interbank offered rate (Libor) for euros rose to 0.76625 percent, its highest since September 3, while the equivalent Euribor rate hit a 10-1/2 month-high 0.827 percent. Euro-denominated bank-to-bank lending rates have been rising in recent months, at first fueled by worries that the sovereign debt crisis was spreading into the banking system, but more recently as a function of the declining amount of excess liquidity provided by the ECB.

“The large expiry in the ECB tender has contributed to (the trend higher) — more banks are now looking for market funding away from the ECB,” said Christoph Rieger, strategist at Commerzbank in Frankfurt.

Meanwhile, the rates implied by Euribor futures contracts eased, with analysts attributing the move to a fall in German government bond yields being passed down the curve to shorter-dated rates.

However, implied future rates for December remain above a record low seen in June.

LIQUIDITY FOCUS

The level of surplus cash in the euro zone banking system will come into focus on Tuesday when the ECB holds one-week and 28-day refinancing operations.

Excess liquidity — a key determinant money market rates — dropped by over 200 billion euros and the duration of outstanding loans has shortened since the July 1 expiry of a 442 billion euro one-year tender.

This means the level of borrowing at the ECB’s seven-day operation determines a large proportion of the excess liquidity in the system, with any further drain likely to place upward pressure on Eonia and Euribor rates.

“All the information we have received over the last two weeks signals the trend in excess liquidity is clearly going down,” said Kornelius Purps, strategist at Unicredit in Munich.

The ECB currently charges banks 1 percent for access to unlimited funding through its refinancing operations, while paying 0.25 percent on deposits.

This 75 basis point spread is a penalty on the banking system, and therefore provides a strong incentive for banks to take no more liquidity than they need, said Laurence Mutkin, analyst at Morgan Stanley.

If the trend for lower liquidity saw a return to a normal ECB liquidity environment — where there is little or no excess in the system — this would imply Eonia close to 1 percent and three-month Euribor somewhere above 1.20-1.30 percent, Purps added.

Last week, euro zone banks took up 229 billion euros of one-week ECB funds. If less than this amount is rolled over, Eonia forwards were expected to rise.

Forward Eonia contracts currently price rates at around 0.68 percent by December.

(Editing by Toby Chopra)

Euro lending rates up, ECB tender in focus