The interbank cost of borrowing dollars and euros held near record lows on Monday as the market prepared for a US policy decision and the final chance to get cheap one-year money from the ECB. Three-month euro Libor rates edged lower ahead of this week's final tender of 1-year funds from the European Central Bank, to be allotted on Wednesday.
"The big eurozone event this week is the tender and there is still a lot of uncertainty over how it will be subscribed," said Calyon rate strategist Peter Chatwell, adding the market was in wait-and-see mode. The strength of demand should give a clearer indication of the health of the eurozone's banking system.
"Low bidding, similar to September's 75 billion euros, could suggest a banking system comfortably funded," ING strategist Chris Turner said. "High bidding, such as the 442 billion euros awarded in June, could suggest a banking system heavily reliant on the ECB for help and wanting to secure funding even though rates could rise towards the end of 2010." The ECB has broken with recent tradition and will conduct the tender at 1 percent but index the rate to its main policy rate, meaning the cost of funds will rise if policy rates rise.
A Reuters poll released last week showed money market traders expect demand of 100 billion euros, 25 billion euros less than forecast in a poll taken two weeks earlier. Since the last 1-year tender in September, banks have let 106 billion euros of shorter-dated liquidity mature, Morgan Stanley calculated.
That still leaves around 65 billion of excess liquidity in the system ahead of the offer of 12-month funds, meaning that even with a relatively low take-up at the tender, liquidity is set to remain ample well into 2010. As a result Eonia overnight rates are likely to stay anchored around their current 0.35 percent level early next year, with no major rise seen at least until banks have to repay 442 billion euros of funds at the end of June. Benchmark US lending rates were little changed at 0.25375 percent. The Federal Reserve will make its final scheduled interest rate announcement this year on Wednesday.