Bank-to-bank euro funding costs rose again on Friday with the three-month rate hitting a 10-1/2 month high, while the equivalent overnight index swap scaled a one-year peak, adjusting to falling excess liquidity. These moves came after the overnight Eonia rate was fixed at 0.488 percent, well above the average of 0.35 percent seen since June 2009 and ignoring the periodic spikes driven by European Central Bank liquidity draining operations.
Eonia is a weighted average rate of all overnight unsecured bank-to-bank lending transactions. With less funds available, overnight deposits at the ECB dropped to 61.6 billion euros, well off an average of around 200 billion euros seen in the previous maintenance period.
"The bottom line is that a trend decline in excess liquidity still seems most likely, although not as swiftly as many expect given the increasing attractiveness of ECB operations amid rising Euribors," said Commerzbank analyst Christoph Rieger.
The three-month euro London interbank offered rate rose to 0.79373 percent, while the equivalent Euribor rate hit 0.861 percent, nearing the ECB's refinancing rate of 1.0 percent. The three-month euro Overnight Index Swap rate traded up to 0.6 percent, the highest in a year, driving the 3-month Libor/OIS spread - a gauge of money market stress - narrower to 19 basis points, suggesting the moves were not due to an escalation of banking worries. The spread narrowing was driven by OIS rising faster than Libor or Euribor fixings and is likely to be temporary with the forwards market signalling a spread roughly in the mid-30 basis points by year-end.
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