Greek repo markets failed to benefit from talk of an EU rescue deal for the country on Wednesday, remaining all but closed, while implied UK rates fell after dovish Bank of England inflation forecasts. European governments have agreed in principle to help heavily indebted Greece, a senior coalition government source said on Tuesday, though a French source close to the situation said on Wednesday said no deal had been reached.
EURO INTERBANK RATES MARK NEW LOW The relief felt in some markets, particularly those for riskier assets, did not feed through to the repo market, where Greek flows have been almost non-existent in recent weeks. There is ample demand for liquidity in Greek collateral repos coming in at 40-50 basis points above benchmark, according to Tullett Prebon, but there are no offers. That compares with the one-month Europe rate of 0.341 percent.
Lena Komileva, head of G7 market economics at Tullett, said flows were unlikely to recover unless bond market volatility subsided, which depends on confidence in Greek sovereign credit. Italian and Portuguese longer repo maturities received stronger bids on the broad improvement in risk sentiment. Meanwhile, massive central bank liquidity saw three-month euro rates mark another new low.
BNP Paribas analyst Alessandro Tentori said, however, that the spread of Libor rates over overnight indexed swap rates (OIS) - currently 21 basis points - may widen if the ECB reverts to variable rate tenders as some banks will have to bid well above the marginal rate to secure liquidity. UK short sterling interest rate futures jumped across the strip and Gilts rallied after dovish Bank of England inflation forecasts and after BoE Governor Mervyn King did not rule out more quantitative easing. Three-month sterling Libor rates nudged higher to 0.63063 percent.
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