RPT-MONEY MARKETS-Liquidity seen up after ECB extends support

(Refiles to remove typo in 1st paragraph)

* Banks seen switching to one-month funds as year-end nears

* Eonia forwards rates fall, excess liquidity could rise

By William James

LONDON, Dec 6 (BestGrowthStock) – Euro zone money markets on Monday
priced for banking sector liquidity to increase at this week’s
European Central Bank refinancing operations after the bank
decided last week to slow its withdrawal of support.

The ECB will offer one-month and one-week funding on Tuesday
in the first refinancing opportunity since elevated tension in
sovereign debt markets pushed it to say it would keep unlimited
funding available until next April.

The amount of maturing loans that banks opt to renew could
reflect the level of tension spilling into interbank funding, as
well as year-end concerns, and will ultimately determine the
path for the Eonia and Libor fixings over the next month.
“We should see some switch from the one-week operation into
the one-(month) maintenance period operation to buffer the
effects from the large tender maturities on Dec. 23,” said
Benjamin Schroeder, strategist at Commerzbank.

Central bank loans worth around 200 billion euros are due to
expire on Dec. 23. The ECB will offer fresh three-month funding
at the same time, allowing institutions who have been frozen out
of interbank markets to secure longer-term funding.

“I think peripheral banks would rather switch to the
three-month operation when we see that funding everywhere else
has become more expensive,” Schroeder added.

Benchmark interbank rates were broadly flat. Three-month
dollar (USD3MFSR=: ) and euro (EUR3MFSR=: ) fixings were unchanged
at 0.30344 percent and 0.97125 percent.

Analysts said banks were likely to roll all the expiring 180
billion euros of one-week funds and 64 billion euros of
one-month funds, with potential for a rise in total borrowing as
banks cover their funding needs beyond the turn of the year.

As a result, the bias was for excess liquidity to increase,
putting downward pressure on overnight borrowing rates over the
course of the new ECB maintenance period beginning on Tuesday.

“Liquidity available in the market will be huge in the
second half of the maintenance period… this should push Eonia
down during the period so I expect, on average, Eonia to be
quite low — around 60-65 basis points,” said Giuseppe
Maraffino, rate strategist at Barclays Capital in London.

The expectation of lower overnight rates — a function of
greater excess liquidity — was seen in one-month Eonia forward
rates (EUREON1M=: ), which fell to 66 basis points from 70 bps.

The recent rise in demand for dollar-to-euro interest rate
swaps resulting from euro zone debt market stress stalled, with
five-year cross currency basis swaps (EURCBS5Y=ICAP: ) easing to
-33.5 bps, well off the November low of more than -40 bps.


The ECB’s extension of banking sector support, along with an
increase in its bond-buying activity, helped calm sovereign debt
market tension late last week. This led European clearing house
LCH.Clearnet to cut the additional margin requirement on Irish
government bonds by 15 percentage points on Monday.

The move reduced the cost of using Irish bonds as collateral
in repo trades, but reversed only one of three 15 percentage
point rises imposed on Irish debt in the last month.

“Irish repo volumes have collapsed by about a half since
LCH.Clearnet started ramping up the initial margins,” said Chris
Clark, analyst at ICAP in London.

“This morning’s announcement is obviously good news but the
extra margin charged is still very high at 30 percent and the
market will likely wait to for evidence of a more sustained
recovery in the underlying cash market before diving back in.”

RPT-MONEY MARKETS-Liquidity seen up after ECB extends support