* ECB tender will struggle to offset LTRO repayments
* Money market pressure tipped to push up short-dated yields
* Long-dated bond yields edge up in light trading
By John Geddie
LONDON, July 22 Short-term government bond
yields and money market rates are poised to edge up on
expectations of a drop in spare cash in the euro zone banking
system, market analysts said on Tuesday.
Economists polled by Reuters predicted a small uptick in
demand for the European Central Bank's one-week main refinancing
operation (MRO) on Tuesday, but not enough to prevent a squeeze
in liquidity with a bumper 21 billion euros of emergency loans
(LTROs) set to be paid back on Wednesday.
Market strategists say a predicted fall in excess liquidity
to one-month lows will push up overnight interbank lending rates
, thwarting the ECB's efforts to keep a cap on
countries' short-term borrowing costs.
"I think the demand on the next MRO will be slightly higher
than the previous one, but we could still have quite a strong
fall in excess liquidity," said Cyril Regnat, fixed income
strategist at Natixis.
"Short-dated government bonds could come under pressure if
we have a stable MRO."
Two-year yields in Germany - the benchmark for
euro zone borrowing - edged up 1 basis point to 0.04 percent on
Tuesday, and are tipped to edge higher in the coming days as
Commerzbank strategist Rainer Guntermann said the liquidity
squeeze that will come from a bumper LTRO repayment this week is
a direct result of the ECB's decision last month to charge banks
to keep their money in overnight deposits.
"You can't force banks to lend," he said, pointing out that
it will take time for policymakers to achieve their goal of
forcing money out of the financial system into the real economy.
The ECB tried to offset the pressure on excess liquidity
last month by terminating its weekly deposit tender to
neutralise the effect of the bond purchases it made at the
height of the debt crisis, but the effects of this liquidity
injection have already eased.
Excess liquidity closed at 128.8 billion euros on Monday,
dropping from nearly 170 billion euros at the end of last month,
and is expected to drop significantly after Wednesday's LTRO
Elsewhere, longer-dated government bonds all edged up
slightly on Tuesday amid light summer trading volumes.
Traders said many investors were sidelined due to ongoing
geopolitical tensions in the Middle East and Ukraine, or were
waiting for scheduled supply in the form of a 10-year bond
auction from Belgium and a new 30-year issue from the European
Financial Stability Facility.
German 10-year bond yields were 1 bps higher at 1.16
percent, as were most other euro zone government bonds.