* Eonia ticks up, tipped to rise further
* Excess liquidity drops to one-month lows
* Futures show short-term yields could rise
* Bund yields edge up on above-forecast flash PMI data
By John Geddie
LONDON, July 24 Euro zone money market rates
edged higher on Thursday and were expected to rise further in
coming days, potentially driving up short-term government bond
yields, after a drop in excess cash in the bloc's banking
The euro overnight interbank lending rate moved
back up to the top end of its recent trading range on Wednesday,
analysts said, while forward rates imply it will almost double
by the European Central Bank meeting in September.
"The market is pricing in this scenario we have been
expecting all along - one with downside risks to liquidity and
upside risks to rates for most of this summer," said Christoph
Rieger, a strategist at Commerzbank.
The spare cash in the euro zone banking system dropped to
104 billion euros on Thursday, its lowest in over a month, after
a bumper 21 billion euros of long-term loan repayments by banks
"This will have an upwards pressure on Eonia. From currently
around about 5 (basis points), I could see it move up to 8,
maybe 9," said RBC's head of European rates strategy Peter
A push higher in money market rates should also see
short-dated bond yields rise more than those on longer-term
bonds, strategists said.
Commerzbank's Rieger said German bond futures already show
this trend with two-year Schatz futures close to their lowest in
a month and 10-year Bund futures at one-month highs
Strategists predict this trend will continue during the
northern summer months, but that the liquidity squeeze is likely
to ease in September when the European Central Bank offers its
first round of targeted long-term loans to banks.
In cash bonds, German 10-year yields edged 2 bps higher on
Thursday to 1.17 percent, as preliminary data showed the
country's services sector growing at its fastest rate in three
The euro zone's private sector expanded at the fastest rate
in three months in July. Market participants
tend to see strong economic data as dulling the chances of the
ECB taking further policy loosening steps that will buoy
Spanish and Italian bonds were the best performers in the
euro zone. Spain's 10-year bond yields dropped 2 bps, returning
to record lows hit on Wednesday of 2.54 percent.
Italian equivalents also dropped 2 bps to 2.72 percent, close to
Traders said Italy's decision to cancel scheduled bond
auctions in mid-August had created more demand for peripheral
bonds in the secondary market.
(Editing by Nigel Stephenson)