* Money market curve could flatten post-ECB
* Traders alert to ECB assessment of early LTRO repayment
By Emelia Sithole-Matarise
LONDON, Feb 5 Money market rates could ease anew
this week with traders braced for potential verbal intervention
from the European Central Bank on Thursday to calm markets
jarred by banks' early repayment of ECB crisis loans.
Bank-to-bank lending costs rose sharply in January, led by
longer-term rates as banks repaid at their first chance last
Wednesday a bigger-than-forecast tranche of three-year loans
which the ECB handed out in late 2011 to avert a credit crunch.
While the rates have eased back after banks on Friday said
they would hand back a fraction of what the market expected at
the second of such repayments, longer-term rates remained
elevated on uncertainty of how speedily excess cash could be
drained from the market over the year.
The repayments are viewed as a sign of healing in parts of
the region's banking sector but the spike in rates is seen as a
de facto tightening of ECB policy which spurred the euro to a
15-month high last week.
Focus is now on the ECB's monthly monetary policy meeting on
Thursday which is expected to keep official interest rates
unchanged with the spotlight on President Mario Draghi's
assessment of the initial repayments and their impact on money
"The Eonia curve is being shaped by expectations of future
repayments so if he says he still doesn't see Eonia fixings
being massively influenced by subsequent repayments in the LTRO,
that could cause a little bit of flattening of the curve," a
money markets trader said.
One-year Eonia rates - which reflect what
overnight bank-to-bank lending rates are expected to average out
over the year - were last around 0.20 percent, having risen as
high as 0.25 percent last week before Friday's second bank
repayment of the LTRO cash.
Three-month Euribor rates, traditionally the
main gauge of unsecured bank-to-bank lending, were unchanged at
0.233 percent with equivalent Libor rates, set by a smaller
panel of banks in London, also unchanged at 0.15429 percent.
The benchmark three-month Euribor rate is still near its
highest level since September hit after the ECB announced on
Jan. 25 that banks would repay early 137 billion euros in
long-term loans - a move that has driven down excess liquidity
financial system to around 484 billion euros.
Yields on German two-year bonds, the euro
zone's most liquid debt and the safe-haven of choice in the
region in times of market strain, also rose sharply last month
before falling back.
"Whenever there was a big back-up in core rates eventually
you had an active feedback into the peripheral countries because
those highly leveraged countries cannot afford to have higher
rates in a gradual recovery scenario," said Elaine Lin, a
strategist at Morgan Stanley.
"We're quite cautious given the sell-off at the front end
and if the ECB tends to be comfortable with such pricing in
front end core yields you may have again an active feedback loop
in the peripheral sovereigns, ie Spain and Italy."
The central bank has already flagged the bank's sensitivity
to a too rapid withdrawal of liquidity last week. ECB Board
member Peter Praet said the ECB would be vigilant to "ensure
that overall liquidity in money market will remain consistent
with the degree of accommodation that the current outlook for
prices and real activity warrant".
In total, the ECB pumped more than 1 trillion euros into the
banking system with two offerings of three-year loans in
December 2011 and February 2012.
The heavy oversupply of ECB cash has long depressed the
rates banks charge each other on lending markets, but a further
significant repayment, expected on February 28, could drive
"We expect the ECB to calm the aggressive market
expectations on the short rates, as this could have negative
implications on the real economy via the increase in the Euribor
rates and the appreciation of the euro," Barclays Capital
strategist said in a note.