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Money markets euro zone banks regaining access to us lending


* U.S. lending to euro zone banks up for fifth month -Fitch* ECB measures slowly restoring confidence in banking sector* Lending still down vs May 2011, unlikely to rebound fullyBy William JamesLONDON, Jan 3 Euro zone banks won better access to the vast pools of short-term dollar funding for the fifth month in a row in November according to a Fitch Ratings survey of U.S. money market funds.

Lending to euro zone banks by the 10 largest U.S. prime money market funds, which had a joint exposure of $670 billion, increased by 8 percent during November, Fitch said. Analysts said the move showed that European Central Bank measures to shore up the euro zone's financial sector were slowly winning back the overseas investor confidence lost in 2011, during one of the worst phases of the euro zone debt crisis."The main reason is that the ECB is really backing any bank financing need and that has reduced the default risk for the banks... all that has reduced the risk perception for U.S. money fund investors," said ING strategist Alessandro Giansanti.

Access to U.S. money market funds, which Fitch said held assets worth $1.47 trillion, is crucial for euro zone banks, which need to borrow short term to pay for assets denominated in dollars. This pool of liquidity can quickly dry up, leaving banks scrambling, as witnessed in late 2011 when confidence in the strength of euro zone banks crashed and the cost of dollar loans spiked.

That prompted the European Central Bank to act, flooding banks with long-term euro-denominated loans and opening up cheap credit lines to the U.S. Federal Reserve. This relieved the worst of the tension and bought policymakers time to plan structural reforms to the bloc's financial institution. While the Fitch data shows this has been effective in restoring some credit lines into the euro zone, lending remains 60 percent below levels seen in May 2011."It is unlikely that (money market fund) exposures to euro zone banks will revert to end-May 2011 levels in the near term, particularly given European banking supervisors' efforts to limit banks' use of short-term U.S. dollar funding," Fitch said in the report. New rules on banks' capital needs were also likely to curb issuance of the short-term dollar-denominated debt instruments popular with U.S. funds, limiting the extent to which trans-Atlantic lending will return, the report added.

Money markets eyes peeled for signs of restocking ecb loans


* Take up of 7-day ECB funding announced at around 1000 GMT* Markets on lookout for signs of restocking after LTRO repayment* Three-month funding to be also offered on WednesdayBy Marc JonesLONDON, Jan 29 Money markets are preparing for a lively couple of days as banks get two chances to replace the three-year ECB crisis loans they will repay this week with alternative shorter-term funding. On Wednesday banks will return 137.2 billion euros - just over a quarter - of the 489 billion euros they borrowed in the first of the ECB's twin three-year loan offerings just over a year ago.

When the ECB announced the larger-than-expected amount on Friday, wholesale bank funding prices jumped as markets realised it removed a thick slice of the 600 billion euros of so-called 'excess liquidity' which has kept rates pinned to the floor for over a year. That money can potentially be re-borrowed, however. Later on Tuesday banks get their usual weekly opportunity to order seven-day ECB funding and on Wednesday there is a monthly offering of three-month loans. They will receive the money on Wednesday and Thursday.

A major take-up in either of the tenders would reduce the impact of the three-year loan payback and send market rates back down. But the latest Reuters poll suggests there will be no major restocking. Banks are expected to take just 14 billion euros more combined than they did in the two equivalent operations a week and three months ago. If correct, it means once dust of the three-year loan repayment settles the overall amount of cash in the banking system would have been cut by around 120 billion euros.

Traders think that market rates could give back some of their recent gains once it is all out of the way, but not much. Benchmark three-month Euribor rates hit their highest level in four months on Monday while one-year eonia rates are at their highest since mid-June."I would expect a little bit bigger amount in the one-week and the three-month tender but not that big. Maybe after everything there would be an overall reduction of around 100 billion euros," said one euro zone-based trader who requested anonymity"I would think 12- and 6- month eonia perhaps would come back down a little bit and then we will see where we go from there," he added.

Money markets higher repo rates cool demand at 4 week t bill auctions


* Tepid demand for U.S. Treasury four-week bills* Better returns available in the repo marketBy Ellen FreilichNEW YORK, March 20 A $40 billion Treasury sale of four-week bills drew the most tepid bidding in just over a month on Tuesday as better rates available in the repo market damped demand for bills offering less attractive returns. The value of bids offered over those accepted at this week's bill auction was 3.99, the lowest since Feb. 14. Dealers' bid was $2 billion smaller than a week earlier, yet they captured a portion of the sale that was $2 billion larger than last week's and amounted to 73.2 percent of the bills sold. Direct bidders took 10.9 percent of the bills, toward the lower end of the recent range."With repo rates ranging from the low teens to mid-20s, demand for 4-week bills yielding 10 basis points or less has been weak," said Thomas Simons, vice president and money market economist at Jefferies & Co in New York. Only investors who have to adjust the average duration of their portfolios "are participating in the auctions," he said. OVERNIGHT TREASURY REPO RATES HAVE CHEAPENED

Overnight Treasury repo rates have cheapened steadily all month and by late last week, the collateral had cheapened to more than 20 basis points and the repo rate was at its highest level since last summer's debt-ceiling crisis."Besides the temporary balance-sheet distortion at quarter-end, which will push repo rates lower, we expect collateral rates to stick near current levels until mid-April," said Barclays Capital market analyst Joseph Abate in New York. Abate said supply appeared to be driving that trend. Dealers' inventories of short coupons and bills climbed to over $80 billion in the first week of March, and dealers have also held "a respectably sized" long position in Treasuries maturing in more than 11 years, he said. Dealers' only short position is in the intermediate sector with Treasuries maturing in six to 11 years.

Abate said the "pile-up" of Treasuries on dealer balance sheets is linked to the Federal Reserve's "Operation Twist" transactions in which the Treasury sells shorter-dated maturities on its balance sheet and uses the proceeds to buy longer-dated Treasuries to keep long-term interest rates low."It takes time for dealers to re-distribute the short-dated paper to final buyers and meanwhile, the dealers need to finance these holdings in the repo market," Abate said. The normal seasonal rise in bill supply has also contributed to higher repo rates, analysts said. That factor should start to fade once the April 17 deadline for U.S. tax returns has passed.

As revenues arrive from taxpayers, the Treasury's need to raise short-term cash will decline and so will bill supply. The Treasury Borrowing Advisory Committee expects bill supply to contract by $120 billion in the second quarter."With (the Fed's) Operation Twist sales continuing through the end of June, we look for repo rates to remain heavy - but closer to 15 basis points," Abate said. One element of uncertainty is whether government-sponsored enterprises (GSEs) will soon return to the repo market."Since July 2011, GSEs have been leaving sizable balances in their deposit account at the Federal Reserve uninvested - generally over $40 billion, but in some weeks much more than that," Abate said. Since these balances are unremunerated, the GSEs have an incentive to invest their cash in the repo, bill, and to a much smaller extent, the (shrunken) fed funds market, he said. When repo rates were under 10 basis points last year, the reward for investing in these markets were probably too small to persuade the GSEs to accept counterparty risk instead of leaving their cash safely at the Fed, Abate said."But now that overnight collateral has cheapened to 20 basis points, the incentive for GSEs to invest in the repo, bill and fed funds markets may be stronger," he said."If GSEs reduce their balance at the Fed and push their cash into the repo market, collateral rates could richen," Abate said.

Money markets interbank pipelines still frozen in euro zone


* Interbank lending volumes steady in January, despite excess cash* Any improvement is expected to be slow, policy dependant* Greece, Portugal hurting confidence among banksBy Marius ZahariaLONDON, Jan 31 Euro zone interbank lending activity is yet to pick up after the first month of the year in a sign that policymakers must complement the ECB's massive cash injections with bold reforms to restore confidence. The European Central Bank threw almost half-a-trillion euros at the banking system in late December via an auction of unlimited three-year euro loans, and banks can take as much cash as they want in another such tender next month. The availability of "easy money" should erase any bank funding concerns for the next three years and normally encourage banks to lend to each other at least on a short-term basis. But the rift between the few top-rated banks in northern Europe and the rest of the euro banking sector that was opened up by the Lehman Brothers collapse in 2008 and widened during the three-year-long sovereign debt crisis is hard to repair. Analysts say an increase in interbank lending activity, seen as key to bringing the euro zone economy back on a growth path, will be a slow process and a lot more policy effort is needed.

A plan to strengthen fiscal unity within the euro zone, a lack of which many economists say is at the root of the current problems, is only in its inception phase, unemployment is high around the bloc and fiscal deficits are naggingly large. Also, risks that the currency union could break up persist, with a vital Greek debt swap deal yet to be reached and fears growing that Portugal will be the next to restructure its debt."We haven't seen much activity in the interbank market despite lower rates. If I'm long cash, why would I lend at lower rates? If I have some confidence in the whole political process I might, but at the moment this is still lacking," a trader said. The average daily volume in the overnight Eonia euro lending markets in January was 30.27 billion euros, little different to December or November and significantly down from 45.4 billion euros in January last year, according to Reuters data.

In September 2008, just before the situation started to unravel, daily Eonia volumes reached over 70 billion euros. One head of money markets at a bank in London who declined to be named saw no signs of pick-up in activity for longer maturities either."Some larger names are talking of an increase in activity perhaps ... (But) from what I see there has been no pick-up in interbank lending activity," he said. FROZEN PIPELINES

A large take-up at February's ECB three-year cash tender may still go a long way in gradually restoring confidence between banks and their counterparties. Expectations about the amount to be taken by banks are on the rise. A Reuters poll showed markets expected the ECB to allot 325 billion euros in three-year loans in February, compared with 263 billion in a previous survey. This is improving sentiment in other asset classes, with short-term debt rates across the euro zone having come down sharply in the past two months and equities rallying. Interbank lending, however, will probably be slower to react."If I have some internal lending restrictions for individual countries themselves or a particular group of banks within a country, I'm going to be cautious still until I have more information about the extent to which they participated (in the first tender)," FXPro chief strategist Michael Derks said. One worry is that, trying to secure ECB loans, some banks bought even more low-rated state debt to use as collateral, thus increasing their exposure to sovereign debt. Analysts say that as banks gather more information about the impact the first tender had on the balance sheets of their counterparties, they might be willing to unclog some of the credit lines."That may come to some degree in March perhaps. The issue is that Portugal is starting to implode ... That will freeze the pipelines again," Derks said.

Money markets positioning for a new round of euro zone stress


* Concerns about banks vs sovereign relationship rise* Money markets may face a new round of stress* Strategists looking for creative ways to position for it* Long end of the curve and relative plays favouredBy Marius ZahariaLONDON, April 13 Money market players are positioning for a new round of financial stress as concerns over euro zone banks' exposure to Spanish and Italian government debt mount, with the duo witnessing fast-rising borrowing costs again. Data showed on Friday that Spanish banks borrowed a record 316.3 billion euros from the European Central Bank in March as they leant heavily on cheap three-year ECB loans due to a lack of market funding avenues available to them. Italian banks also borrowed a whopping 270.1 billion, earlier data showed. Judging by the rally in Italian and Spanish government debt seen at the start of last year, analysts assume that a lot of the cash taken from the ECB has been placed in debt issued by the two sovereigns. But as concerns rise over Spain's ability to enact fiscal discipline without sending its economy into a deeper recession, the contagion risk has taken centre stage again and Spanish and Italian yields have been rising since mid-March.

This leaves domestic banks exposed to sovereigns whose credit worthiness is weakening in the eyes of many. If banks started selling those bonds to stop losses or to get cash to pay back their own debts, borrowing costs for Italy and Spain would rise even faster towards unsustainable levels. As the euro zone's financial system is strongly intertwined, the impact would be felt throughout the bloc."There is an increased strength of the nexus between banks and the sovereigns," RBS rate strategist Simon Peck said."We're going to see an environment whereby at some points in the future (banks) have to liquidate their sovereign holdings to cover redemption needs. The consequence is that when things do turn around, market moves are exacerbated."

HOW TO PLAY IT With so much liquidity in the banking system already, short-term money market rates are likely to remain stuck around very low levels - and strategists have to be more creative than usual to make profits on bets for more money market stress.

The best way to position for it is at the longer end of the money market curve, which is less influenced by the excess cash lingering around in the banking system, they say. Peck recommends betting on a widening of the spread between long-term forward rate agreements (FRA) and overnight index swaps (OIS), a forward-looking measure of counterparty risk based on derivatives of the interbank Libor and overnight Eonia rates. To focus this trade on the long end of the curve, he specifically recommends a contract targeting a bigger difference between the two-year FRA and OIS rates starting in two years time. The 2y2y forward FRA/OIS last stood at 32 basis points and could widen to 75 bps, Peck said. Societe Generale's head of fixed income strategy Vincent Chaigneau also said short-term rates and other derivative products based on them are likely to remain inert in the near future. But he noted that when stress increases, the FRA/Eonia spreads tend to widen relative to FRA/Sonia, their UK money market equivalent, and recommends paying the three-month FRA/Eonia June 2012 contract while receiving the FRA/Sonia June 2012 . The difference between the two contracts was 14.5 basis points on Friday. SocGen started the recommendation at 15.5 bps with a 0 bps target and a 20 basis points stop-loss level."There's a feeling that there are not going to be liquidity problems in the near term. All the (bonds that banks) bought - if they need liquidity they can sell those bonds. They will take losses as bond prices have declined but that protects their liquidity," Chaigneau said."It is a concern that Spanish and Italian banks have increased sovereign exposure so much ... and the (FRA/OIS) complex cannot be immune to the troubles that we see in the sovereign space again."

Money markets short term rates ease after draghi warning


* Eonia contracts fall, curve flattens after ECB conference* ECB President Draghi seen calming fears of liquidity drain* Euro slides vs dollar as traders unwind recent steepeningBy William JamesLONDON, Feb 7 Longer-term money market rates eased on Thursday after European Central Bank President Mario Draghi sought to temper the rise in interbank borrowing costs since banks began paying back three-year ECB loans early. Draghi estimated that, even after the initial repayments of the second of the ECB's LTRO crisis loans, excess liquidity would not drop below 200 billion euros ($268 billion) - the level at which overnight borrowing costs typically begin to rise.

He also said the central bank would closely monitor conditions in the money market and their impact on monetary policy, stressing that the ECB would remain "accommodative". That double-barrelled warning against ramping up market rates to an extent that effectively tightens monetary conditions prompted some interbank borrowing rates to fall."I would base this move mainly on their liquidity expectations, and the signal that, if their liquidity estimations prove wrong at some point, the ECB would fall back on this other option of 'closely monitoring'," said Benjamin Schroeder, strategist at Commerzbank.

One-year Eonia contracts fell 3 basis points to 0.16 percent while the two-year rate dropped 5 bps to 0.27 percent - a flattening of the money market curve that partially unwound the recent trend. Since the first repayment of ECB loans came in well above consensus last month, money market curves have steepened as traders brought forward the timing of when surplus cash in the system would fall low enough to push rates up. The next major batch of repayments will come on Feb. 22 when banks have their first opportunity to pay back some of the 529 billion euros borrowed at the ECB's second refinancing operation in March last year.

A Reuters poll on Monday showed traders expect 123 billion to be paid back in that tranche. That would not be enough to take the excess liquidity pumped in by the ECB below the 200 billion euro threshold. Reuters data shows the current liquidity excess at 495 billion euros. Market participants also highlighted the central bank's increased emphasis on the appreciation of the euro, which hit a 15-month high last week spurred in large part by the rise in short-term euro market interest rates. But the euro fell versus the U.S. dollar during the news conference, putting in on course for its biggest daily fall since June, as Draghi said the exchange rate was important to growth and price stability. Analysts said this fall reflected the flattening in money market curves."Draghi struck an optimistic tone, but was maybe slightly more concerned about the LTRO repayments and euro strength than most had expected. Thus short rates are falling a bit and the euro is weakening slightly," said Nordea chief analyst Anders Svendsen in a note.