* Two-year German bond yields near one-year lows
* ECB to release 108 billion euros into banking system
* Analysts see slow healing process in money markets
By Marius Zaharia
LONDON, June 17 German two-year bond yields held
close to one-year lows on Tuesday as the market braced for a
liquidity boost from the European Central Bank that is expected
to keep downward pressure on short-term interest rates.
The ECB effectively releases 108 billion euros into the
interbank market on Tuesday - the first time it has not held a
weekly deposit tender to neutralise the effect of the bond
purchases it made at the height of the crisis.
The outstanding amount of those bonds is 162.7 billion
euros, but the ECB failed to drain it all last week.
German two-year bond yields were a tad higher
on the day at 0.033 percent, within touching distance of the
0.027 percent hit on Monday, which was the lowest since the end
of May 2013.
"This is evidence that the ECB measures are quite effective
at least from a market perspective," said Elwin de Groot, senior
market economist at Rabobank. "The ultimate impact on the
economy remains to be seen."
Germany and the Netherlands sold treasury bills at a
negative yield on Monday, the direct result of the ECB cutting
the rate it offers banks to keep their money in overnight
deposits to minus 10 basis points.
The ECB's move is effectively penalising banks for not
putting money to work. Negative T-bill yields means governments
will pay investors back less than they borrowed when the paper
Policymakers hope negative rates in time will force money
out of the financial system and into the real economy. But some
analysts remain pessimistic.
"If you don't want to lend money to businesses because you
don't trust the economic viability of companies you will not do
it, no matter what incentives you get from the central bank,"
said Marius Daheim, chief strategist at Bayerische Landesbank.
"The credit channel is blocked ... People don't trust the
economy because growth is feeble, inflation is low, household
debt is pretty high and unemployment is high as well."
The total sum of money injected into the market on Tuesday
might change depending on how much banks are taking up at the
regular ECB offering of one-week loans. Last week, banks took
137 billion euros.
A similar take-up at Tuesday's tender would suggest the euro
zone money markets remain fragmented. It would mean the ECB's
cash withdrawals had usually been funded by the higher-rated
banks in the euro zone's healthier states, while lower-rated
peripheral banks remain reliant on ECB liquidity.
At the same time, money fails to flow smoothly from the core
banks to the peripheral banks.
"That's what I would expect at this early stage of the new
rates regime," Rabobank's de Groot said.
"But the current regime may speed up the process of
defragmentation... Some banks, maybe a small percentage, may
decide to lend a bit more to the periphery. But we're talking
about months, quarters, maybe a year."
(Editing by Nigel Stephenson)