MONEY MARKETS-Grab for German collateral fades

Fri Dec 14, 2012 8:49am EST

* RepoFund index shows German repo costs back above zero

* Easing euro zone tension relaxes grab for top collateral

* Dwindling deposit rate cut prospect also driving rates up

By William James

LONDON, Dec 14 (Reuters) - Reduced demand for top-quality collateral has pushed the cost of short-term borrowing using German government bonds above zero for the first time in two months, according to a newly-launched repo funding index.

The move signifies an easing of the clamour for top-rated collateral in the money markets -- the foundation of financial trading, in which banks take short-term loans from each other to fund their bets on a variety of assets.

The RepoFunds rate on German bonds rose to 0.002 percent according to the index's latest fix late on Thursday. That means a borrower is paying 0.2 basis points for a one-day loan secured against a German government bond.

The RepoFunds indexes, launched on Thursday by interdealer brokers ICAP and electronic dealer platform MTS, are based on electronically-executed repo trades that use a bond, bill or floating rate note issued by the relevant sovereign.

Prior to yesterday's fixing, the rate had been negative for two months, meaning lenders were so keen to hand over cash in exchange for scarce, yet ultra-safe, German collateral, they were willing to pay to do so.

"We've popped our head back above zero again and I think this reflects a more benign outlook for the euro zone," said ICAP analyst Chris Clark, speaking in the Thomson Reuters Global Markets Forum.

The conclusion of a deal to reduce Greece's debt and pay out aid money, alongside quicker-than-anticipated progress on euro zone wide banking supervision, have helped allay some of investors' worst fears over the future of the currency bloc.

The less treacherous outlook has helped the euro rise by around 1.5 percent against the dollar this week.

DEPO TO REPO

Falling expectations of a cut to the rate the ECB charges on deposits also helped push short-term funding costs higher, after the strong probability priced into markets following last week's ECB meeting has been steadily eroded.

European Central Bank policymakers seeking to free up clogged lending markets have considered charging banks to deposit cash -- a move that would also send repo rates lower -- but have recently backed away from the idea.

"Negative rates would impose a penalty for core banks that are holding excess reserves while peripheral banks are unlikely to benefit," Commerzbank strategists said in a note to clients.

"If the economic growth revisions are down to the slowdown in activity in core economies, a negative depo rate could thus even be counterproductive."

Traders have pared bets on a cut using forward contracts on the unsecured overnight lending index, Eonia, which also measures the cost of short-term funding.

Matching the rise in German repo rates, Eonia forward contracts dated between March and August have risen back above zero after a dip into negative territory last week.

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