LONDON: Overnight rates looked set to stabilise over the next month after banks borrowed sufficient ECB funds on Tuesday to keep liquidity conditions comfortable, avoiding a repeat of the previous period's cash squeeze. Banks borrowed 205 billion euros at the European Central Bank's one-week and one-month refinancing operations, less than the amount expiring but more than economists had forecast.
That meant the surplus ECB liquidity, provided to support interbank lending, was well above the rate seen at the start of the April maintenance period, which was characterised by low liquidity and expensive borrowing conditions for banks.
"Looking at the overall excess liquidity we're around double the amount we had at the start of the current reserve maintenance period, so fairly comfortable in comparison," said Commerzbank rate strategist Benjamin Schroeder.
This meant a repeat of the high Eonia rates seen during April was seen as less likely, prompting the one-month fixed-term Eonia rate to drop to 1.034 percent, down around 5 basis points on the day.
"The fact that we had fewer bidders at the one-week (tender), while we had a strong increase over the last few weeks at these operations means that maybe there could be less stress in the market than recently," said BNP Paribas strategist Patrick Jacq.
Recent stress, which saw Eonia hit its highest in over two years last month, stemmed from mixed views on whether the ECB would raise rates in June and from lower market participation around Easter holidays -- not a spillover from rising risk aversion in government bond markets, analysts said.
"All the money market stress indicators you can use... they are all close to their all-time lows. They have bounced a bit in the last week, but not to any large degree," Commerzbank's Schroeder said.
The spread between the benchmark Libor three-month interbank rate and overnight rates -- a measure of counterparty risk that rises in times of money market stress -- was last at 20 basis points. The spread topped 35 bps in December last year.
Three-month Libor fixed slightly higher at 1.38063 percent, and the equivalent Euribor was 1.426 percent.
BOE REPORT EYED
In the United Kingdom, markets were looking ahead to Wednesday's release of the Bank of England inflation report to gauge whether the recent dovish tone on rising interest rates was justified.
Earlier in the year, a rate rise in May was seen as highly likely but expectations have since shifted dramatically and after keeping rates on hold earlier this month, the first hike was now not seen until early 2012.
Analysts said after moving so far out, expectations may not shift much further even if the report paints a benign picture on inflation.
"There'll probably be some opposition to the move if the market tries to push out the first rate hike further than where we are," said Eric Wand, rate strategist at Lloyds Bank in London.
"I don't think in front of the inflation report there's going to be people willing to take on massive risk either way but if you do see the market rally coming out of the report there'll probably be some guys looking to take advantage and sell into that."
Three-month Sterling Libor rates remained unchanged for the seventh session in a row at 0.82188 percent.
Comments
Comments are closed.