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(Adds information on Euribor open interest, fixes graphic)
By Adam Parry and Michael Cartine
LONDON, Jan 17 (IFR) - Short-end interest rate expectations spiked sharply higher on Thursday morning with front-month June Euribor - the most liquid futures contract - falling by 7bp to 99.66.
The capitulation stems from concerns over the return of a large chunk of LTRO funds at the end of the month, allied to market rumours that the ECB is considering new rules that would require banks to provide more information about loans used as collateral for LTRO borrowing.
Large stop loss orders were triggered below 99.69, a level last seen back in August 2012. The move has been matched further down the curve. The Red June contract, which indicates market expectations of three-month Euribor in June 2014, is 10bp lower at 99.45.
That stop loss activity in the Euribor strip was triggered by a very strong bid in EONIA, allied to the liquidation of cross-currency longs versus eurodollars.
That is having a knock-on effect on Schatz futures, which are 10 ticks lower at 110.41, taking underlying Schatz yields to 0.17%, the highest level since June last year.
The Euribor sell-off really began on Thursday after Draghi informed the market that a cut in the refinancing rate had not been discussed at the December ECB meeting.
That sell-off saw front-month March 2013 Euribor drop 5bp in the immediate aftermath of the press conference, and was accompanied by a sharp rise in the contract's open interest, which rose from 550k prior to the ECB to close to 650k on January 10.
That spike in open interest was, however, confined to March contracts, with front-month June more or less unchanged, which could indicate that some market players were putting on downside trades ahead of LTRO cash being returned. (Writing by Alex Chambers, reporting by Michael Cartine and Adam Parry; editing by Julian Baker)