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Money markets rise in long term rates may be close to end


Aug 22 A recent improvement in economic data has pushed long-term euro money market rates away from their record lows, but the rise may hit a wall as they approach levels seen before the ECB cut its main interest rates in July. As short-term interest rates have held steady at ultra-low levels for months, investors and strategists are increasingly looking at derivative products that project money market rates into the future. These products are often referred to as the long end of the money market curve and have seen increased volatility recently, offering more trading opportunities. German and French data showing the euro zone's two largest economies avoided recession in the second quarter, as well as better than expected U.S. retail sales and jobs data have soothed worries about the state of the global economy. Expectations the European Central Bank will take steps to lower Spanish and Italian borrowing costs and calm the debt crisis that has driven much of the euro zone into recession has also driven money market rates higher. But analysts think developed economies will at best recover very slowly, prompting major central banks, including the ECB, to maintain easy monetary policy for a prolonged period. And a lack of detail about the ECB's plans is keeping uncertainty high about their effectiveness.

Financial products projecting the overnight euro zone Eonia rate four years into the future trade at 0.43 percent, compared with a record low of 0.2872 percent hit in late July. Three-year Eonia traded at about 0.24 percent, having risen from a record low of around 0.12 percent in July, when, in a sign of how flat the curve was, spot Eonia was at a similar level. Spot settled at 0.103 percent on Tuesday."If risk appetite is improving and there's a feeling that bad economic data is already priced in then these rates ... will be rising, but how far they can go is limited," said Vincent Chaigneau, head of fixed income strategy at Societe Generale. Long-term Eonia rates now trade just below levels seen before the ECB cut the main refinancing rate to 0.75 percent and the deposit facility rate to zero on July 5.

Max Leung, an interest rate strategist at Bank of America Merrill Lynch Global Research, said this was a sign that the rising trend may be coming to an end. PLAYING BLUES

Leung recommended investors place a bet on a drop in one-year Eonia rates starting in three years, rather than the four-year spot Eonia, due to more attractive levels. He said the rate, also known as 3y1y forward Eonia, or blue Eonias, could drop by 20-25 basis points from current levels of around 0.98 percent in the next two-three weeks. JPMorgan rate strategist Fabio Bassi also has a "bullish bias" on blue Eonias, even though he had no specific trading recommendation on them."There is a lot of event risk on the table in the next few weeks, and a lot of uncertainty about the ECB (intervention) plans," Bassi said. The ECB meets next on Sept. 6. JPMorgan expects the ECB to cut the deposit rate to minus 25 basis points in September or October and Bassi recommended betting on a fall in October-dated forward Eonia rates, now trading at around 5 basis points."The risk/reward is such that if they (the ECB) cut the deposit rate to -25bp, (October Eonia) could fall as low as minus 10. If they don't, then you only lose 4-5 basis points," he said.

Money markets short term rates could ease further as ecb looms


* Money market curve could flatten post-ECB* Traders alert to ECB assessment of early LTRO repaymentBy Emelia Sithole-MatariseLONDON, 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 markets.

"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 in the financial system to around 484 billion euros. CAUTION 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 rates higher."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.