Money markets interbank rates extend slide but activity tame

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Benchmark interbank lending rates maintained their downward trek on Wednesday driven by the huge cash boost from the European Central Bank but activity remained subdued as banks looked for gains in higher-yielding assets. Most measures of money market stress were stable as the one trillion euros of low-cost three-year liquidity the ECB has pumped into the banking system over the last two months provided a shield from ongoing uncertainty over the outcome of Greece's debt swap deal with private creditors. The hefty cash infusion has driven the rates at which banks lend to each other to their lowest levels in 17 months and lessened the urgency for banks to raise money in the open market."Liquidly is available in large sizes. However, there's not a lot of additional volume going through he interbank market yet. I guess people who are long cash might be investing in European sovereign debt as the yield is more attractive than interbank rates," a money markets trader said."As we go along I would expect some improvement. For now in the short end no-one needs to raise anything so volume is down and in the terms everyone may be trying to get better yield in other asset classes than interbank trading."

Peripheral euro zone bond markets, notably Spain and Italy, have benefited from the cash injection as their banks have used the cheap loans to buy sovereign bonds, driving yields especially on shorter-dated debt to multi-month lows. Banks took 530 billion euros in the second dose of cheap central bank money last week after gorging on 489 billion euros in December, and the liquidity is expected to push bank-to-bank lending rates close to the record low of 0.634 percent seen in March 2010. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending, fell to 0.911 percent from 0.920 percent, the lowest level since September 2010. Equivalent Libor rates fixed by a smaller panel of banks also fell.

The three-year cash injection from the ECB has pushed excess liquidity in the money market to 803 billion euros according to Reuters calculations. Shorter-term one-week rates, the most heavily influenced by the level of cash in the system, ticked down to 0.320 percent from 0.323 percent, while overnight rates fell to 0.342 percent from 0.351 percent the previous day.

The three-month lending rates have already dropped by over a third since the ECB announced plans to lend banks three-year money back in December, but are still well above the low of 0.634 percent they hit in early 2010. But the market believes that rates may fall even further than in 2010 as banks are awash with cash, and will be for a long time."With so much excess liquidity in the system, we expect EONIA to continue to trade at an approximate 10 basis point spread to the (ECB) deposit facility and for Euribor fixings to continue drifting lower as tail funding risks have receded," said Elaine Lin, a rate strategist at Morgan Stanley. The glut of cash is keeping short-term market rates well below the ECB's main 1 percent policy rate. Instead the bank's 0.25 percent overnight deposit rate is acting as a floor for market rates. Euribor futures showed markets were anticipating three-month rates to fall to 0.705 percent by June, with a further drop to 0.655 percent by September.