Benchmark interbank eurozone lending rates extended their climb on Friday with analysts expecting them to grind higher still in coming weeks as excess liquidity in money markets dwindles. The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - rose to a 15-month high of 1.029 percent, up from 1.025 percent.
The overnight EONIA rate rose to 0.862 percent on Thursday, four percentage points higher than a month ago. It is edging close to its June 2009 high of 0.878 percent, which it repeated on September 30, 2010 after banks slashed their consumption of ECB funding in a string of key lending operations. "The excess liquidity in the money market is too small to cap the upside in rates and the increase in rates is not yet large enough to trigger more excess liquidity," Christoph Rieger, a strategist at Commerzbank, said.
The rise in EONIA and other short-term money market rates pushed two-year German bond yields above 1.0 percent on Thursday - the first time they have done so since late March - as liquidity conditions tighten. Strategists said the path for EONIA would be determined by how much of expiring 3-month loans banks choose to roll over into an ECB tender next Wednesday.
"EONIA should drift lower on a solid 3-month LTRO, but anything close to a 23 billion roll of the maturing 3-month tender will push EONIA to 1 percent," RBS strategists said. In a further sign of the healing process in euro zone money markets, commercial banks hoarded the lowest amount of cash at the ECB's overnight vaults. Banks deposited just over 21 billion euros overnight, the lowest since November 10, 2009.
The London interbank offered rate for 3-month euros rose to 0.96875 percent versus 0.96250 percent. Equivalent dollar Libor was unchanged at 0.28844 percent, reflecting the contrast between the looser monetary policy of the Federal Reserve and the ECB's gradual scaling back of liquidity support measures.
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