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Money markets us repo rates take back some of weeks dip


U.S. repurchase agreements rose on Friday, recovering a portion of the week's losses that have come amid speculation the Federal Reserve could eventually cut the interest rate it pays on excess reserves to banks. Investors are mulling whether the Fed could follow the lead of the European Central Bank, which this month cut to zero the deposit rate it pays banks for parking money with it overnight. Fed Chairman Ben Bernanke, in speaking to Congress this week, listed a cut in the interest paid on excess reserves (IOER) as one of the tools available to the central bank in its efforts to prop up the economy. Some investors believe the Fed may actually take the step, and the rate on repos secured by Treasuries has dipped this week as a result. Repo rates were last quoted on Friday at 21 basis points, up from 17 basis points on Thursday but down from 29 basis points on Monday."Although cutting IOER received only a peripheral mention by Bernanke and has not been listed as a policy option in the Federal Open Market Committee minutes since last year, the market has begun pricing in a cut," said Joseph Abate, market strategist at Barclays Capital in New York.

Abate adds however that he considers it "unlikely" the Fed will cut IOER, which currently stands at 0.25 percent. Separately, euro zone money markets have been wary of pricing in any prospect the ECB might cut its deposit rate below zero, but there are signs that such an unprecedented move is no longer considered unthinkable. The forward euro zone EONIA overnight interest rate for December traded at 6 basis points on Friday, less than the average spread of 8 basis points over the ECB's depo rate seen in the past few months. The rate projected for December is just half of Thursday's 0.12 percent EONIA settlement and indicates that the market is pricing in a tiny possibility that the ECB deposit rate may go below zero later this year.

"It does not seem to have been any serious flows in the market yet, but some in the market are starting to talk about this," said Max Leung, an interest rate strategist at BofA Merrill Lynch Global Research in London. Recent comments from ECB policymakers suggested that the central bank is keeping the door open for further easing, but the form any such step would take is unclear. If the ECB ever does cut its refinancing rate from the current record low of 0.75 percent, the question arises whether it will keep the gap over the depo rate at the usual 75 basis points.

If the deposit rate turned negative, the ECB would have to change the way it manages banks' excess reserves in the current account as well if it wants to penalize banks for parking cash in the ECB's safe coffers rather than lending to each other or to businesses. The only certainty in the market about the ECB's next move is that it will not cut the depo rate again in the near future, because it will take several months to assess the full impact of the July 5 cut to zero. Many are already expressing serious doubts that the zero rate will spur activity in the interbank market and filter through to the real economy. In fact, some of the biggest money managers have already restricted access to European money market funds due to the almost non-existent returns. Besides, most banks are not lending because they do not trust each other and that may not change even if they are penalized for it."In an environment where it is return of capital that counts, rather than return on capital, you may well have to pay someone to be the guardian of your money," said Simon Peck, rate strategist at RBS in London."Just because the deposit rate is zero or going lower doesn't necessarily imply that straight away you can change your risk management framework."

Refile money markets markets price out more imminent monetary easing


(Refiles to remove extraneous comma in headline)By Ana Nicolaci da CostaLONDON Jan 10 Euribor futures fell and Eonia forwards rose on Thursday as investors priced out the chance of an imminent rate cut after the European Central Bank sounded more optimistic on the euro zone's prospects. The ECB left interest rates on hold at 0.75 percent, which was expected. But President Mario Draghi said the decision was unanimous - a departure from last month when he said there was "a wide discussion" on reducing rates. Draghi also made no mention of a deposit rate cut, in contrast to December when he said that had been discussed."People were still looking for some kind of split between core central bankers and periphery central bankers within the Council - similar to what we saw in December - so the unanimous rate-on-hold decision came as somewhat of a surprise," said Benjamin Schroeder, strategist at Commerzbank."Draghi has pushed the market towards the belief that no rate cuts are coming."

Euribor futures <0#FEI:> fell across the 2013 and 2014 strip, with the February and March 2013 contracts now down 2 basis points on the day and the June 2013 one 5 bps lower. All three stood flat at the beginning of the news conference. Euribor futures were traditionally used as a gauge of interest rate expectations but excess liquidity in the market has made it a less reliable indicator. The refinancing rate at which the central bank lends money is the main tool used to encourage bank lending and boost the economy. But banks are already flooded with cheap ECB loans, meaning the deposit rate charged on excess reserves has a more significant impact on short-term interbank borrowing costs.

Eonia forwards, used to bet on where the Eonia overnight borrowing rate will be in the future, rose across the 2013 strip. Eonia rates are particularly sensitive to expectations surrounding deposit rate moves, since the latter serve as a sort of floor to overnight rates. The March 2013 contract was at 0.0797 percent, up from 0.059 percent when the news conference began, while the June 2013 contract stood at 0.0823 percent compared to 0.0421 percent when Draghi began speaking. Forward rate agreements fell sharply last month after Draghi revealed a deposit rate cut had been discussed, but they have recovered as other ECB members subsequently played down the likelihood of it taking place.

"For me, what was important was that Draghi was continuing to stress the positives and really trying to take the focus away from any underlying weakness in the economy. There was more discussion on the things that have picked up and the net signal was that there is no imminent easing ahead," said Simon Peck, rate strategist at RBS. Draghi said that the euro zone economy should recover later in 2013 and that there are already some signs of stabilisation, although he also said the risks to the economic outlook remained to the downside."Today has really just cemented what had become apparent in the ECB rhetoric subsequent to the December meeting, which is that they are unlikely to cut the deposit rate in the next couple of months," Peck added. Alessandro Giansanti, senior rates strategist, at ING pointed to the fact that the December 2013 Eonia forward was at 0.1363 percent - double the level of the current Eonia rate at 0.069 percent - as further evidence that the deposit rate cut bets had been unwound."Now I think the probability of a cut in the deposit facility is close to zero," he said.