(Corrects garbled spelling throughout)
* Banks take up only 3.7 bln euros in 3-month funds
* Shows banks not swapping 3-yr loans for short-term funds
* Rise in short-term rates overdone, some analysts say
By Emelia Sithole-Matarise
LONDON, Jan 30 Money market rates marched higher
on Wednesday after banks passed up twin opportunities this week
to replace three-year loans with shorter-term funds, fostering
concerns excess cash may start dwindling faster than predicted.
Banks took up only 3.7 billion euros of three-month funds at
the European Central Bank's financing operation on Wednesday,
less than half the 10 billion average forecast in a Reuters
On Tuesday, they rolled over slightly less than 125 billion
euros in seven-day funds at the ECB's weekly tender. The lack of
a pickup in demand at both operations signaling that banks were
not simply shifting the 137 billion euro in three-year loans
they repay on Wednesday into shorter-dated funds.
Many in the market see this as a sign of healing in parts of
the crisis-hit euro zone banking sector but lessening cash in
the system means monetary conditions are effectively tightened,
pushing short-term money market rates up.
The results of the twin ECB tenders and the initial
repayment of the ECB's three-year long-term refinancing
operation (LTRO) leave about 500 billion euros of excess
liquidity in the banking system.
While this is still quite ample and will keep key overnight
Eonia bank rate around current record lows, uncertainty
over how much excess cash will be drained from the system as
banks repay the three-year funds weekly has jacked up wholesale
bank funding prices.
"The market is pricing the scenario of big repayments, a
reduction in liquidity surplus and a tightening of liquidity
conditions. So the big repayment announced last week and this
week's tenders supported such expectations," said Giuseppe
Maraffino, a strategist with Barclays Capital.
"Markets now will be very sensitive to the weekly repayments
and all data on liquidity conditions, but I don't expect Ionia
fixing to be significantly affected by the three-year LTRO
repayments so I don't expect it to go up as the market is
pricing now," he said.
Overnight Eonia forward contracts, which lock in an
overnight borrowing rate over a longer period, remained under
pressure. One-year Eonia rose as high as 0.25
percent from around 0.23 percent before the results of the ECB
Bank-to-bank Euribor lending rates fixed at 0.23
percent from 0.226 percent, with equivalent Libor rates also
edging higher, while Euribor futures <0#FEI:> pointed to higher
rates from the end of 2013 out to 2017.
Wholesale bank funding prices have been rising since the
announcement on Friday that banks would repay this week a higher
than forecast 137 billion euro of the three-year loans that the
ECB said averted a credit crunch in late 2011 and early 2012.
Stabilising euro zone markets and the perception the ECB was
starting to tighten monetary conditions while other major banks
such as the Federal Reserve and the Bank of Japan were still
pump-priming, has also buoyed the euro, which spiked to a
14-month peak of $1.3563 on Wednesday.
"There's some unwinding of trades which were in play before
the start of the year, possibly positioning for a rate cut and
very dovish monetary policy so they have to cut their position,"
said Patrick Jacq, a strategist at BNP Paribas in Paris.
"And we probably have some speculative flows now betting on
a more hawkish monetary stance which to me doesn't make any
sense but in the near term this is the bias and there could be a
correction at some stage."
Jacq, Maraffino and other analysts reckon, however, that the
rise in money market rates seemed overdone, particularly with
excess liquidity still expected to remain ample enough to temper
a sharp rise. Historically, money market rates only tend to move
freely once the cash surplus drops below 200 billion euros, a
scenario largely viewed as unlikely with banks expected to repay
a total of 300 billion euros of the three-year funds this year.
Money market rates effectively determine what interest rates
banks charge firms and consumers and a sudden spike in rates
could put unwanted stress on the euro zone's fragile
The latest ECB survey showed that banks made it harder for
firms to borrow in the fourth quarter and expect to tighten loan
requirements further in coming months even though their own
funding constraints have eased.
(Chris Pizzey, London MPG Desk, +44; 0; 207 542-4441)