One measure of money market stress is expected to fall in the next few weeks after the European Central Bank provides banks with one-year cash, easing funding concerns, while overnight rates are seen stabilising at lower levels. The ECB will offer banks 12-month funds on October 26 and again in December after already sparse interbank lending markets dried up again on worries over financial institutions' exposure to sovereign debt.
"The one-year tenders will be pure liquidity additions and we could get to 400 or 500 billion euros of excess by the end of the period," said RBS rate strategist Simon Peck. That compares to around 230 billion euros right now. The abundance has seen banks front-load their reserve requirements by around 120 billion euros, the largest amount since May 2010, according to Reuters data, while overnight deposits at the ECB are over 120 billion euros as well. But the spread between benchmark three-month Libor rates and equivalent maturity overnight rates has remained stubbornly high - around 65 basis points compared with 80 basis points in September and around 20 basis points in July.
In the months after the ECB first offered banks 12-month funding at the height of the credit crunch in 2009, the spread fell from just over 50 basis points to near 20 basis points. Forward spreads point to a fall to around 53 basis points by March and 42 basis points by September.
Markets meanwhile have scaled back expectations of an ECB rate cut this year, with an 80 percent chance of an easing priced in for December, according to Societe Generale and a cut seen by February. The ECB held rates at 1.5 percent last week. Benchmark three-month euro Libor rates were little changed at 1.505 percent.
Comments
Comments are closed for this article.