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Money markets euribor rates dip, pace of decline to slow

* 3-month Euribor rate fall below 0.80 percent* Pace seen slowing as it heads towards 0.63 pct record low* Spread between 12- and 3-mo Euribor rate seen tighteningBy Ana Nicolaci da CostaLONDON, March 27 Bank-to-bank Euribor rates fell below 0.80 percent for the first time since July 2010 and the pace of decline is seen slowing as it heads towards record lows. With the European Central Bank poised to keep refi rates on hold for a while, analysts increasingly see three-month Euribor rates stabilising around 63 bps - record lows hit in March of 2010. It fell to 0.79 percent on Tuesday from 0.80 percent in the previous session. At record lows, Euribor rates would still offer roughly a 30 bps premium over the overnight Eonia rate, which stood at 0.35 percent in the previous session. The Eonia rate in turn provides a pick-up over the ECB's deposit facility rate of 0.25 percent. Markets scaled back expectations of further monetary easing in the euro zone after the ECB warned on inflation at its last monetary policy meeting. But austerity and unemployment in poorer euro zone member states could still drag on the region's overall growth, thereby keeping price pressures at bay.

"Our view is that the ECB will remain on hold until the end of next year," Giuseppe Maraffino, fixed income strategist at Barclays Capital said, explaining his forecast that Euribor rates will hit a trough at around 65 bps."Going forward I expect a slowdown in the pace of decline of the three-month (Euribor rate), so this should reduce the spread versus the 12-month and 3-month rate and the six-month equivalent."The spread between 12-month and three-month Euribor rates should tighten as far as 50 basis points, Maraffino said, from 64 bps currently. The six-month equivalent last stood around 30 bps."It is a positive yield curve and I don't think rates are going up within the next year," said a trader. "I would sell the June 2012 Euribor future and I'd buy the March 2013."

The June 2012 Euribor contract was at 99.37 while the March 2013 stood at 99.27 <0#FEI:>INFLATION-WATCH

ECB Mario Draghi on Monday sought to allay concerns in Germany that the ECB's 1 trillion euro funding operation could fuel inflation, saying an improvement in money markets since the move did not pose a risk to price stability. Data this week is expected to show euro zone inflation reached 2.5 percent in March, according to a Reuters poll. That would be a fall from 2.7 percent the month prior but still above the ECB's target of just below 2 percent. But analysts said money markets did not show much concern with inflation at this juncture, with short-term rates still under pressure by massive excess liquidity in the financial system."Inflation (does) not represent first-order risks for the euro economy," Matteo Regesta, strategist at BNP Paribas, said forecasting 3-month Euribor fixings to fall to at least 0.70 percent, albeit at a slower pace. He expected the ECB to keep rates at 1.0 percent until at least January or February 2013 when banks are first allowed to repay 3-year ECB funding. Since the rate charged on the 3-year LTRO money is an average of the refi rate over the duration of the loan, a rate hike would mean higher cost of funding for banks, Regesta added."Even if the German economy overheats and head inflation moves relatively higher, I think the refi rates will be on hold ... until those early repayment dates."

Money markets rates sink as ecb repayment flood slows to a trickle

Feb 1 A rapid rise in euro money market rates came to an abrupt halt on Friday as the initial flood of crisis loan repayments to the European Central Bank shrank to a trickle. Having paid back, at the first time of asking, over a quarter of the 489 billion euros ($664 billion) handed out in the ECB's first round of 3-year LTRO loans, banks will return only 3.4 billion next week. Money market traders polled by Reuters at the start of the week had predicted a 20 billion euro repayment and the much smaller return, after the initial 137 billion euro payback, left many rethinking how quickly the excess of cash in the system would return to a more normal level. One-year Eonia rates fell below 0.195 percent for the first time this week, having been as high as 0.243 percent before the repayment was announced. The euro also dipped. The one-year Eonia rate reflects what overnight bank-to-bank lending rates are expected to average out at over the year, and has already risen 0.25 basis points -- the equivalent of a typical ECB interest rate hike -- since December."It's fair to say that banks put on a good show last week, surprising the market with the volume of cash handed back to the ECB, but this was likely a one-off," Icap strategist Chris Clark said.

"The road back to normalisation of euro money markets will be a very long and slow one."The weekly repayments are gaining increasing market attention, both because of the jump in interbank rates and because they are being seen as a proxy of banks' health and ability to survive without central bank help. They have another two years to pay back the money and can repay as little or as much as they want each week, but returning the cash is increasingly being seen as a badge of honour to be waved at rivals, rating agencies and shareholders.

Credit Agricole was the latest bank to say it had started repaying its LTRO funding on Friday and its in-house strategists said the small overall weekly number would prompt the market to revert to its original view that the pattern of repayments would be steady rather than sudden. They expect Eonia rates for one-year and beyond "to gradually rise - hence, normalise towards the refi rate - while the shorter-dated tenors, particularly up to the six-month tenor, should have scope to fall modestly from current levels," they said in a note. The effect of the liquidity withdrawals has been greatest on longer-dated money market rates because the excess of cash is large and not expected to fall to 'normal' levels for some time.

For Europe's struggling debtor countries and the ECB, the jump in banking market rates is not ideal because it effectively tightens money policy and creates unwanted stress just when the bloc's economies are showing fragile signs of improvement. The loans, which banks can keep for up to three years, were designed to stop lending freezing up after its sovereign debt crisis spiralled in 2011. Influential ECB Board member Peter Praet demonstrated the central bank's sensitivity to a too-rapid withdrawal of liquidity earlier this week."We will exert vigilance to ensure that ... the overall liquidity conditions prevailing in the money market will remain consistent with the degree of accommodation that the current outlook for prices and real activity warrant," Praet said. Market analysts will now focus on the ECB's monthly policy meeting next week before switching the bulk of their attention to Feb. 22 when the ECB will announce how much banks want to instantly repay of the second 530 billion LTRO

Money markets repo rates fall as us launches review

* U.S. requests data on holdings of 7-year note issue * 7-year repos near zero pct vs negative rates last week * Morgan Stanley has funding access despite rating worries * Morgan Stanley debt cost elevated; CDS down vs Monday By Richard Leong NEW YORK, Feb 28 The interest rate banks and dealers charge each other for overnight loans fell on Tuesday as the U.S. government launched a review of a severe shortage of a seven-year note issue in the repurchase market last week. That shortage, which repo traders call "specialness," led to a scramble for seven-year notes last week. It forced some traders who especially needed the seven-year note issue, due in January 2019, to pay more than 3 percent in interest to borrow it. The "specialness" partly fueled bids at a $29 billion auction of new seven-year notes last Thursday, analysts said. Since then, repo rates have fallen on easing demand for Treasuries. On Tuesday, the interest rate on overnight loans secured by any Treasury security was last quoted at 0.14 percent, down from 0.18 percent on Monday. The overnight repo rate on seven-year Treasuries was last quoted at zero, flat from late Monday and a far cry from last week's 3-plus percent rate. "It calmed down a lot since Monday. All is quiet with that (seven-year) issue," said Joe D'Angelo, head of money markets at Prudential Fixed Income in Newark, New Jersey, who oversees about $50 billion in assets. Analysts said there was scarcity in nearly all Treasury maturities last week in the repo market, which banks and dealers rely on for short-term cash. But the cost to borrow most maturities was far below that seen on the seven-year issue. While repo specialness occurs frequently due to supply and technical factors, it is rare for the government to investigate them. What caught the attention of the U.S. Treasury Department was likely because the specialness occurred with a recent seven-year note issue, analysts and investors said. "You usually don't have a short-base in 7-years," said Mary Beth Fisher, an interest rate strategist at BNP Paribas in New York. The U.S. Treasury said late Monday that investors who had large positions of seven-year notes due January 2019 must report their positions to the New York Federal Reserve on Friday. There has been market speculation that some traders amassed seven-year issues in the open market upon learning a hefty sum of seven-year Treasuries was pre-sold to a large investor which was unlikely to lend them out in the repo market. Rather than failing to deliver the seven-year notes to the investor before the settlement of last Thursday's auction, dealers paid dearly for them, even at a cost above the 3 percent penalty charge for failing to deliver the security to the buyer. MORGAN STANLEY Meanwhile, Morgan Stanley has continued to access funding in the repo market despite concerns about its credit ratings, traders and analysts said. The U.S. investment bank said in a filing with the U.S. Securities and Exchange Commission late Monday that it will have to post up to $6.52 billion in collateral to counterparties and clearinghouses if Moody's Investors Service were to cut its credit rating. On Feb 15, the rating agency said it will begin a review of Morgan Stanley and 16 other major banks and securities firms due to fragile funding conditions, tougher regulations and other issues. Morgan Stanley could still easily obtain overnight cash in the repo market, according to traders, even as the cost on longer-term debt has risen since Moody's initiated its ratings review nearly two weeks ago. In the open market, Morgan Stanley's one-year floating-rate notes were quoted at 200 to 300 basis points above the London interbank offered rate on Tuesday. In comparison, the bank's five-year debt was quoted at a spread above 400 basis points. In the credit default swap market, the cost to insure against a Morgan Stanley default in five years fell to 324 basis points, down from 337 basis points on Monday. Two weeks ago, it was 294 basis points, according to Markit. Morgan Stanley's five-year CDS price is still the highest among major U.S. banks. Goldman Sachs' five-year CDS price was 252 basis points on Tuesday, while J. P. Morgan's five-year CDS was 108 basis points, Markit said.

Money markets rise in euro rates pauses, unlikely to reverse

* Long-term euro money market rates stable* Rates unlikely to fall back to last year's levels* LTRO repayment pace key for future movesBy Marius ZahariaLONDON, Feb 8 Euro zone money market rates stabilised on Friday, in a sign ECB chief Mario Draghi's attempt to temper a recent rise was working, though his remarks were not seen strong enough to put rates back on a downward path. Draghi said on Thursday he would monitor money markets to ensure policy remains "accommodative". He estimated that even after the initial repayments of the second of the European Central Bank's LTRO crisis loans, expected at the end of the month, excess liquidity would not drop below 200 billion euros -- the level at which overnight borrowing costs typically begin to rise. The comments pushed longer-term money market rates lower by 3-5 basis points on Thursday. On Friday, one-year Eonia contracts were flat at 0.1690 percent, while the two-year rate was slightly higher at 0.2740 percent.

Analysts said Draghi's remarks had cooled expectations about how fast excess liquidity would come down, but did not convince investors rate cuts were on the agenda."He probably just capped rates rather then sending them on a downward path," FXPro chief economist Simon Smith said."His comments put in the minds of the market the idea that maybe (a cut) could just happen and that maybe they're getting ahead of themselves. But I don't see that as a central scenario. They are aware that it's not without problems."The ECB left its main refinancing rate unchanged at 0.75 percent and its deposit facility rate flat at zero percent on Thursday.

Analysts say a cut in either rate could be counterproductive by lowering incentives for banks to trade between themselves in money markets, which is the opposite of what the ECB is trying to achieve. When banks find easy access to funds in money markets they feel more comfortable lending into the real economy. Eonia volumes for January suggested a rise in rates led to an increase in longer-term interbank lending activity. REPAYMENTS

Key for the path of rates in future is the pace at which banks repay their three-year loans to the ECB taken in December 2011 and February 2012 when the central bank tried to prevent a credit crunch by offering unlimited long-term cash. The ECB said banks would pay back another 5 billion euros of such loans next week, bringing the total payback of the 489 billion in loans taken in January to 146 billion. The amount was above a 3 billion euros forecast in a Reuters poll."This is a decent size, but not on the path to payback at a rate which will impact Eonia this year too much," said Orlando Green, rate strategist at Credit Agricole. He expected one-year and longer rates to keep rising as part of a "normalisation process" in euro zone money markets. ING strategists recommend a bet that one-month Eonia rates 11 months in the future will be 20 basis points. The trade recommendation was activated at a level of 30 basis points and stops are placed at 35 bps. The rate was last 25 bps, according to data from Tullet Prebon. Levels of 30 bps, ING says, are consistent with a reduction of 384 billion euros in excess liquidity, which would be "too aggressive, due to the current uncertainty on the economic growth ... and the political risks in ... Italy and Spain."The target rate of 20 bps was last seen as recently as mid-January and is way above the negative levels seen in December before the rising trend began in anticipation of a squeeze in excess liquidity, now at around 500 billion euros.

Money markets scope for further drop in euro rates seen limited

Aug 28 Euro zone interbank lending rates plumbed new lows on Tuesday as weak lending data fuelled expectations the ECB will cut interest rates as soon as next week, but the decline may not have much further to go. Three-month Euribor rates have collapsed from around 1.5 percent late last year to just 0.29 percent on Tuesday, a result of the European Central Bank flooding banks with longer-term loans and resuming interest rate cuts."The current level incorporates already expectations of a cut in the refninancing rate at the September meeting," said Barclays Capital rate strategist Giuseppe Maraffino."Room for a further decline is limited."The ECB is expected to cut its record low refinancing rate by a further 25 basis points to 0.5 percent on Sept. 6, according to a Reuters poll of economists. Bolstering the case for a rate cut, data showed loans to households in the euro zone, which is on the brink of recession, fell in July, reflecting weak domestic demand.

Loans to companies ticked up only slightly, suggesting a credit squeeze persists despite banks being stuffed with record amounts of central bank funding. Commerzbank rate strategist Benjamin Schroeder said the downward trend in Euribor rates may pause after the ECB meeting. He saw only a small amount of room for further falls if the central bank leaves its refi rate at 0.75 percent."If the ECB keeps the refinancing rate on hold, we still see some scope to the downside (for Euribor), maybe not to the degree we're seeing now but the zero rate argument is still strong and could bring rates down."

Schroeder does however see room for a more substantial fall if the ECB cuts rates as expected, basing his case on the prices banks are submitting to the panel that sets the Euribor rates. The lowest quote submitted on Tuesday was 0.16 percent, while the highest was 0.42 percent."When we saw the trough in rates in 2010, there was a very strong skew to the lower rates, whereas now we are still pretty much distributed towards the middle, or even the high end," Schroeder said.

He said the three-month Euribor rate could fall as low as 0.18-0.20 percent in the second half of September. One technical factor that may prevent this, however, is the spread between Euribor rates and Eonia overnight interbank lending rates. That three-month spread has fallen to all time lows on a forward basis of around 17 basis points, something Maraffino already sees as overdone."These are very, very tight levels...and reflect an improvement in sentiment with the market knowing that the ECB is ready to intervene," he said."That reduces liquidity concerns and risk in the European banking sector so we're seeing this compression but room for further tightening is quite limited."

Money markets supply pushes short term us rates higher

* Bill rates, repo collateral rates, show easing in markets * Interbank lending rates steady ahead of ECB 3m tender * Strong demand for ECB liquidity could spark more worries By Emily Flitter and William James NEW YORK/LONDON, Feb 24 U.S. money markets closed out the week with an easing of conditions both in the repo and short-term Treasury markets, where demand for securities showed new slack. The extreme conditions that were present earlier in the week in the repo market, where five- and seven-year Treasury notes were trading as repo collateral at dramatically negative rates on Tuesday and Wednesday, eased further on Friday. In the Treasury bill market, rates rose as demand ebbed for the extreme safe-haven, very low-yielding securities. In both cases, new supply seemed to be the source of the market move. The Treasury Department sold $35 billion in new five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. Both auctions drew strong demand and a lower-than-expected yield, forcing Treasury traders to buy more securities outright and borrow fewer of them in the repo market. The Treasury Department announced a $20 billion sale of 49-day cash management bills on Thursday. The coming sale will add more supply to the short-term bill market. In addition, the Federal Reserve sold short-term Treasuries twice this week, also adding to the supply. Tom Simons, money-market economist at Jefferies & Co In New York, said the Treasury's CM announcement seemed to have a noticeable effect on the short-term market. "The whole bill market is a little bit heavier because of this increased supply," he said. "I think it's possible we could get another mid-April maturity CM sometime soon so that would put further pressure on the market." AWAITING ECB TENDER Meanwhile, interbank markets will remain in the thrall of broader investor risk appetite next week as the European Central Bank reveals demand for its three-year loans, with a high take-up likely to buoy sentiment and push lending rates lower. Financial markets will be holding their breath on Wednesday when the ECB unveils how much three-year cash banks have borrowed in the second, and possibly last, ultra-long lending operation. In a bid to alleviate bank funding pressures the ECB has loosened collateral rules and temporarily opened up unlimited access to long-term loans, a move that has also soothed spiking tensions in the sovereign bond market. In the past, interest in central bank liquidity operations has been limited to money market experts seeking to gauge the impact on short-term interest rates. The traditional dynamic was the greater the excess cash, the lower rates would fall. But in a system already swimming in more money than it needs, bank-to-bank lending rates are now more likely to rise or fall depending on whether the refinancing operation boosts support for the euro zone's ailing sovereign bond market. The latest Reuters poll points to a demand of 492 billion euros at the long-term refinancing operation (LTRO). WHEN THE DUST SETTLES Looking beyond the assumption that above-consensus demand would push rates lower at first, analysts saw some risk that the move would not be sustained. "If there's a big number it could be an initial positive reaction by the market, but then they will turn to looking at the crisis from a more fundamental perspective and whether this is enough to turn it around," said Elwin de Groot, senior market economist at Rabobank in Utrecht, the Netherlands. "In our view, we need more measures by European leaders to do that, so it could well lead to more negative market sentiment in the days following - even if there's a big take-up." Demand well in excess of the consensus may also raise broader economic concerns: in the first instance that banks were in worse health than the bullish market had assumed, before more structural worries come to the fore. "That (knee-jerk) may move into a concern that banks might not be focusing on core business quite as much," said Peter Chatwell, rate strategist at Credit Agricole in London. "Ultimately, to improve the macroeconomic environment we need banks not just to be full of funding, but looking to take real economy business opportunities."