March 15, 2011 / 4:41 PM / 9 years ago

MONEY MARKETS-Yen Libor jumps on rising counterparty risk

 * Benchmark yen Libor in biggest daily rise since Nov. 2009
 * Move expected to be shortlived on BoJ liquidity boost
 * Euro Libor falls on ample liquidity
 By Emelia Sithole-Mataarise
 LONDON, March 15 (Reuters) - Benchmark Japanese yen
interbank rates jumped by the most in a day on Tuesday,
reflecting rising counterparty risks as a deepening nuclear
crisis in quake-hit Japan fueled risk aversion globally.
 Some analysts said they expected yen interbank rates to
grind higher but at a slower pace after the Bank of Japan
offered to pump 5 trillion yen ($61 billion) into the banking
system on Tuesday. 
 This followed a record injection of 15 trillion yen in
same-day market operations and eased monetary policy further to
support the economy recover from a triple blow of a massive
earthquake, tsunami and nuclear emergency.
 While euroyen futures <JPYIRS0#JEY:> edged higher after the
BoJ moves, three-month yen Libor JPY3MFSR= fixed up at 0.20000
percent from 0.19250 percent, its highest since mid-October.
 "As the power situation deteriorated today, and stock
markets tumbled, it should not be surprising that this is
reflected in (yen) Libor rates as risk will have risen and
counterparty risk will have increased as losses look to be
rising," said David Rea, an economist at Capital Economics.
 "The greater the risk, and the greater the perceived loss to
the economy and by extension the financial system, the greater
the pressure on Libor. The Bank of Japan can, and undoubtedly
will, do what it can to ensure there is liquidity, but this will
not remove risk."
 Signs of dollar strains in the Japanese market were largely
muted for now with the gap of 3-month Tokyo interbank offered
rate ZTIJPY3MD= over yen LIBOR JPY3MFSR= largely steady
around 0.14 bps. This spread was at a record 20 bps in the
aftermath of the 2008 global financial crisis.
 
 ECB RATE HIKE BETS TRIMMED
 In the euro zone, interest rate futures rallied, pushing
their implied yields lower as traders scaled back how
aggressively the European Central Bank will raise official
borrowing costs as Japan's disaster and the Middle East conflict
clouded the outlook for global growth.
 Euribor futures <0#FEI:> were up three to 15 basis points
across the 2011/2012 strip, with the sharpest moves at the back
end of the curve.
 "The market is really questioning whether the ECB can still
come forward with a hike as equity markets are sliding," said
Benjamin Schroeder, a strategist at Commerzbank. 
 "The global risks have grown with the Japanese earthquake,
nuclear power plants disaster and the potential effects on the
economic outlook," he said.
 Overnight rates corresponding to the European Central Bank's
next meeting in April EUIRP25O1=R have slid by 10 basis points
from Thursday's peaks, as investors saw some risk the bank would
back away from the strong signal it sent last week that rates
would begin rising next month.
 The market is now pricing in two interest rate hikes by the
end of the year compared with three before the Japanese disaster
[ECBWATCH]. Some analysts still think the ECB could move as
early as April after ECB policymakers kept up their hawkish
rhetoric. [ID:nECBQUOTES]
 "The curve is pricing in a fair amount of expectation for
April, so on balance both the analyst community and dealers are
reluctant to price it out ... The more the situation in Japan
continues, the more we will have to reassess that."
 (Additional reporting by William James in London and
Takahiro Okamoto in Tokyo; Editing by Ruth Pitchford)

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