Interbank rates decline

Euro-denominated money market rates edged down on Wednesday, but analysts said expectations of low overnight borrowing costs into the second half of 2011 may already be priced in, leaving forward rates open to correction. Three-month Euribor and euro Libor rates continued their recent slow downward trend, falling to 0.998 percent and 0.93438 percent respectively.
Interbank rates have trended lower as markets anticipate the banking sector will continue to make use of the European Central Bank's provision of funding beyond June. Overnight Eonia rates were little changed at 0.422 percent, despite reduced demand at Tuesday's weekly ECB tender, owing to the large funding surplus banks built up over year-end. However, expectations of where the rate will be in the second half of the year, as shown by forward markets, were beginning to look too low, analysts said.
Three-month forward Eonia agreements beginning in July showed rate expectations had fallen by around 14 basis points during the latter part of December following continued large take-up of ECB loans. However in recent sessions the rate has reversed direction, climbing 3.5 basis points to 0.8257 percent this week.
Data suggested overnight rates were set to be around 80 bps by June's European Central Bank meeting, which BNP Paribas's Alessandro Tentori said looked too low given the ECB's often-stated desire to withdraw its support measures as soon as market conditions allow. Three-month dollar Libor and the US two-year swap spread both held steady, underscoring the calm in dollar funding markets.
Dollar funding costs have eased over the past couple of weeks after edging higher in early- to mid-December, when year-end funding demand and jitters over the eurozone's debt woes pushed up the cost of borrowing dollars. The cost of swapping euro interest rate payments into dollars cheapened, shown by five-year euro/dollar cross currency basis swaps rising 1.5 bps on the day to -29.5 bps.