* 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 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
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.