* Banks to repay 137 bln euros next week
* Higher-than-forecast figure bumps up money market rates
* Excess cash could be kept high by ECB weekly operations
By Emelia Sithole-Matarise
LONDON, Jan 25 Short-term money market rates
rose on Friday after euro zone banks said they would repay more
of the cheap European Central Bank funds that have kept the
financial system afloat than the markets expected.
Banks plan to return 137 billion euros of the 490 million
the ECB handed out in late 2011, the central bank said, beating
average estimates on the early repayments of around 100 billion
euros in a Reuters poll early this week.
Euribor futures , which price in expectations of
where the market expects interbank rates to be in future, fell
across the 2013-2015 strip, with longer-dated contracts falling
as much as 12 basis points on the day, pushing their rates up.
Short-dated German bond yields rose to a 10-month
high of 0.28 percent, briefly above U.S. counterparts.
Overnight Eonia forward contracts, which lock in an
overnight borrowing rate over a longer period, jumped across the
2013 curve, with one-year Eonia back at a
six-month peak of 0.22 percent.
Many in the market expected short-term rates to remain
elevated or even go higher in coming weeks as markets price in
the possibility that excess cash may start to dwindle more than
expected if banks pay back big chunks of the total 1 trillion
euros the ECB handed out in later 2011 and early 2012.
Spot overnight rates are expected to remain at
their ultra low levels, however, given the belief there will
still be enough cash in the system through 2013 to keep them
anchored near the ECB's zero deposit rate which acts as a floor
for the market.
"Today's number...shows that the repayment is not only
coming from core banks...Given that Italian and Spanish banks
took a majority of the funds, they could be repaying some too,"
said Alessandro Giansanti, a strategist with ING.
"That's a point that could drive the total repayment north
of the 300 billion euros total expected (for 2013) and that
could start to have meaningful effect on the excess liquidity in
the system that's why we expect further steepening on the money
market curve," he said.
Historically money market rates, which effectively underpin
what banks charge firms and consumers for loans, only tend to
move freely once excess cash drops below 200 billion but the
lengthy repayment timeline has left them in uncharted water.
ECB WEEKLY FUNDS KEY
Anything higher than the 300 billion euro initial estimated
payback this year would more than halve the amount of so-called
"excess liquidity" sloshing around the system that has kept
bank-to-bank lending rates pinned at record low levels for
almost a year.
However, that surplus was likely to remain above the 200
billion mark with many in the market expecting some banks,
especially from the euro zone's weaker periphery, to roll over
the longer-term financing into the ECB's three-month tenders
"The high liquidity surplus, along with the ECB's commitment
to support banks maintaining the 'fixed rate full allotment'
procedure at its refinancing operations, should limit any
possible widening," BNP Paribas stragesists said in a note.
"However, the market is likely to remain sensitive to the
next announcement and therefore, volatility on EONIA rates,
especially at the medium/long tenors, is likely to remain high."
The ECB announcements give no detail on which banks are
repaying the funds early, but some market participants said
Friday's number indicated some banks from Spain and Italy - who
took the lion's share of the initial ECB funds - might be
Confirmation of this could lift confidence in the market
that some those ailing banks were finally weaning themselves off
ECB life support and back onto private lending markets.
"From a fundamental perspective, how positively we would
interpret more aggressive LTRO repayments would depend on which
banks are repaying the loans. Accordingly, we are reluctant to
read too much into today's aggregate data," said Michael
Symonds, financials credit analyst at Daiwa Capital Markets.
"More important will be the granular detail regarding the
repayments - by country and by institution - that will filter
through in the coming weeks."