The volume of futures contracts betting on the rate of return on US dollar deposits in European banks remains elevated, suggesting ongoing repositioning in cash markets, including the market for US Treasuries, Credit Suisse analysts said this week.
Michael Chang, interest-rate strategist at Credit Suisse, said the volume of December 2012 "green pack" Eurodollar futures, which anticipate the rate on term deposits of dollars in European banks in the future, was still higher on Friday than its year-long trendline indicated it should be. "There's some room for it to go before we really get to some stabilisation," Chang said.
A sell-off in the longer-dated Treasury market began in early November after the Federal Reserve unveiled a $600 billion Treasury purchasing program designed to help stimulate the economy. Treasury traders had piled into long positions ahead of the Fed's announcement and began shedding them with dramatic haste following the release of the program's details.
The higher trading volume in Eurodollar futures indicates the Treasury sell-off isn't over; there are more positions that need to be unwound, Credit Suisse analysts wrote in a note on Wednesday. "That gap is narrowing, but it's not as narrow as we would like it to be," Chang said on Friday, referring to the difference between the normal expected volume and the elevated volume currently visible in the market.
In Europe, euro-priced interbank borrowing costs look set to grind lower into year-end as tensions over Ireland's banking system spur demand for the ECB's remaining three-month cash tenders, boosting excess liquidity. Three-month Euribor slipped to 1.040 percent on Friday from 1.041 percent as many analysts predicted the European Central Bank would have to rethink its policy of gradually withdrawing emergency liquidity.
The equivalent Libor rate - set by a smaller panel of banks than Euribor - was unchanged at 0.97875 percent, after easing for seven successive sessions. Liquidity-sensitive overnight Eonia dipped to 0.632 percent from 0.707 percent and is seen falling below 0.50 percent towards year-end with excess cash seen up from 40-50 billion euros. Some analysts say even if Ireland gets aid as soon as next week for its banks - the most dependent on ECB loans - it would take time to restore confidence in weak euro zone banks that have found it difficult to access cheaper funds in the market. Bank-to-bank 3-month lending rates traditionally sit just above the ECB's headline rate, but the ECB's tactic of lending out unlimited cash during the financial crisis triggered in 2007 had long kept them well below the benchmark rate. The ECB is gradually winding down the provision of long-term loans, with 97 billion euros of 1-year funds expiring on December 23, but will provide three-month funds on November 24 and December 22 at attractive rates compared with 3-month Euribor above 1 percent.
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