Shifts in demand at European Central Bank cash tenders this week are pointing towards a large take-up of three-year loans by eurozone banks in February, strengthening the case for lower short-term interest rates in the near term. Investors who are nervous about the risk of a chaotic Greek debt default after another setback in talks on a debt swap deal, are drawing some comfort from the auctions' results, seeing signs that the euro banking system is building up a safety cushion.
Banks reduced their intake of three-month ECB funding to 20 billion euros on Wednesday, compared to 45 billion euros they borrowed in October and 35 billion euros in a Reuters poll. On Tuesday, they took 130 billion euros in one-week cash, 10 billion more than expected.
"This is a shift of the collateral out of the three-month tender and into the one-week tender to have it ready for the three-year," Commerzbank's interest rate strategist Benjamin Schroeder said. A Reuters poll in mid-January showed the ECB is expected to hand out 263 billion euros at its second three-year cash tender in February, but Schroeder said expectations may have risen after Wednesday's drop in demand for three-month loans. This compares to 489 billion euros taken at the first tender, but J.P. Morgan strategists estimate a 300 billion euros take-up would be "equally as powerful".
They assume that 100 billion euros will be rolled over from existing liquidity operations, 100 billion euros would be used for prefunding maturing bank debt, leaving the other 100 billion euros for carry trades. The three-month London interbank Offered Rates (Libor) for dollars fell on Wednesday to 0.55660 percent versus 0.55910 percent in the previous day, having gradually dropped from around 30-month highs at the start of the year.
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