Implied euro rates at lows

Implied eurozone interest rates squeezed lower on Thursday as markets took the view that some countries' fiscal problems will make it difficult for the European Central Bank to scale back its stimulus measures. Two-year bond yields and interest rate swaps - which were also driven down by receiving interest related to corporate bond issuance - hit new lifetime lows.
Euribor interest rate futures also hit new highs, pushing their implied yields lower. The September Euribor contract rose as far as 98.99. "We think some large stops were triggered yesterday ... The market has been caught short at the start of the year on the back of some people calling for (ECB) rate hikes by the fourth quarter," said BNP Paribas rate strategist Alessandro Tentori.
Market interest rate expectations for December, as measured by OIS forwards, have fallen to 0.85 percent from 1.35 percent at the start of the year, according to the bank. "The market perception is that while the ECB will clearly not get (involved in) any sort of sovereign bailout, the least they should do is support any efforts by upholding their extraordinary measures for longer or delaying their exit. This is what the market is currently playing," said Christoph Rieger, strategist at Commerzbank in Frankfurt.
Overnight borrowing from the European Central Bank fell sharply on Thursday after almost a week exceeding 3 billion euros, easing concerns about potential banking troubles. Money market traders had said the jump was due to technical factors and had expected the amounts borrowed to fall back on Thursday after banks received 81.9 billion euros in weekly funds from the central bank on Wednesday.
Three-month euro Libor rates held near their record lows, while equivalent sterling rates nudged higher. UK interest rate futures contracts dated September through March were also at highs as rate hikes there looked increasingly unlikely any time soon. Data released on Thursday showed lending to British businesses contracted at its fastest ever pace in December, despite the BoE pumping 200 billion pounds into the banking system through its now paused quantitative easing programme.
Britain's broad money supply did grow a modest 0.6 percent in December, but at 5.1 percent, the annual rate was the lowest since 2000. Three-month dollar Libor edged higher after minutes from the Fed's January meeting suggested a reasonably upbeat outlook for the economy, and several policy makers want to soon begin withdrawing the monetary stimulus that has served as a pillar of support for US debt markets. Meanwhile, the Bank of Japan kept interest rates on hold and held off on new policy initiatives on Thursday as widely expected, but persistent deflation is likely to keep government pressure simmering for more action.