MONEY MARKETS-Signs appear that ECB's zero-rate move may work
LONDON, Sept 25
LONDON, Sept 25 (Reuters) - The European Central Bank's cut in its deposit rate to zero may be slowly breathing life into euro zone unsecured money markets, though the evidence is far from conclusive.
After a slight dip in August, mainly due to seasonal effects, volumes in the euro zone overnight Eonia rates market have inched higher this month and on one day last week topped 30 billion euros for the first time since April.
This, to some analysts, is a sign banks are widening the list of counterparties they choose to lend to as record low rates prompt them to take more risk to increase returns on their cash.
"What we're seeing is that some of the high-quality banks have started to lend to lower quality banks. In order to get some remuneration they are willing to take more risks," said Barclays Capital rate strategist Giuseppe Maraffino.
Daily average Eonia volumes for September are 25.7 billion euros, compared with 20.9 billion in August, 23.7 billion in July and 23.5 billion in June, according to Reuters data.
In September 2008, before the financial crisis froze interbank lending, daily Eonia volumes reached more than 70 billion euros.
The data diverges from volumes seen in the equivalent overnight Euronia rate, which is arranged by a much smaller panel of top-rated money brokers.
Since just before the ECB's July's deposit rate cut, volumes in Euronia have shrunk almost three-fold to just below 3 billion euros, according to Barclays data. Euronia last fixed at -0.0017 percent, compared with 0.095 percent for Eonia.
The Euronia data suggests that trade among top-rated money market players are shrinking in volume while the Eonia data suggests some of those players may be lending to perceived lower-rated counterparties.
"This is a very encouraging sign. If the improvement in market sentiment continues, (Eonia) volumes should continue to rise," Maraffino said.
Euronia is fixed in the UK by the Wholesale Markets' Brokers Association, while Eonia is calculated in Frankfurt by the European Central Bank.
TOO EARLY TO TELL
However, there is an important shortcoming to the hypothesis that banks are beginning to expand the list of lenders they want to do business with again -- the fact that usually banks need more cash for window-dressing before the end of a quarter.
"There is more lending going on and this is consistent with the overall developments in markets," Commerzbank rate strategist Benjamin Schroeder said, referring to an increase in investors' appetite for risk following the ECB's rate moves and its pledge to buy potentially unlimited amounts of government bonds.
"But it may also be related to quarter-end activity so I don't know if we should read too much into these volumes at this stage," Schroeder added.
A turn for the worse in general sentiment is also possible, with investors uncomfortable with the fact that Spain, at the forefront of the euro zone crisis, appears reluctant to ask for a bailout and activate ECB bond-buying.
Outside interbank markets, some money market players have also noticed an increase in demand for cash products.
"We see continued growth (in demand for) assets up to one-year," said Shahid Ikram, chief investment officer at Aviva Investors in London.
"Zero-rate policy from central banks has meant that corporates and banks have been able to issue very efficiently and there has been significant demand for that."