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Long-dated eurozone interest-rate swaps marched lower on Tuesday as investors locked in returns, with gloomy prospects for the global economy bolstering the view that interest rates are unlikely to rise anytime soon. The 30-year euro interest rate swap fell to 2.84 percent, a low not seen since December 2008, while the US equivalent held around its lowest since early 2009.
The moves reflect a general trend towards flatter curves as investors look to longer-dated assets to secure cash flows. Ten-and 30-year German bond yields have also hit record lows this week, and 10- and 30-year US yields have fallen sharply. "The longer you think central banks are going to keep financing rates very low, the more incentive there is to buy or receive long rates," said Laurence Mutkin, rate strategist at Morgan Stanley. While the eurozone economy appears to be doing well relative to the United States, where the Fed is about to start a fresh round of stimulus, some of the region's banks remain highly dependent on the European Central bank for liquidity.
Banks took 155 billion euros in one-week funds from the ECB on Tuesday, against a maturing amount of 154 billion euros. Meanwhile, borrowing by Portuguese banks from the ECB rose 21.5 percent in July from June to a record 48.8 billion euros ($62.5 billion) as access to market funding remained tight. Spanish banks' borrowing also rose slightly in July, data showed on Friday, although the numbers largely reflect market conditions before European bank stress test results were released.
Three-month euro Libor rates edged up to 0.8346 percent. Three-month dollar Libor rates continued their two-month-long grind lower, fixing down almost a basis point at 0.35219 percent, with the Federal Reserve set to restart its buying of Treasury debt later on Tuesday in a bid to jump-start a slowing economy and avert deflation.

Copyright Reuters, 2010

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