Benchmark eurozone interbank lending rates held near their record lows on Tuesday as banks continued to take large amounts of central bank liquidity, while implied rates were squashed as the market scaled back rate hike expectations. Take-up at the European Central Bank's one-week tender rose again to 82 billion euros from 76 billion euros last week.
Last week's take-up was also up more than 20 billion euros, a figure that more-or-less corresponded with the amount of maturing three- and six-month funds the central bank did not renew. "These results are a clear indication that liquidity is abundant in the system and demand is till quite elevated," said BNP Paribas rate strategist Matteo Regesta.
And with no drop-off in excess liquidity, EONIA overnight rates are set to stay pinned around their current 0.32 percent level. Meanwhile, a rise in the use of the ECB's marginal lending facility since Thursday evening - to more than 3.8 billion euros from typically less than 100 million - has the market speculating about who needs the money.
However, traders say there is only cause for concern if the borrowing remains elevated on Thursday night this week, when the proceeds of this week's seven-day tender will have reached banks. "The thinking is it's one bank that didn't pick up enough last week and is struggling to get money in elsewhere. If it's back to normal on Thursday then there's no problem, if not then there may be a problem," said one trader.
Implied interest rates remained near Monday's lows as the market scaled back expectations for a tightening of monetary policy in the face of shaky growth and jittery financial markets on concerns over debt-ridden Greece. BNP Paribas says there has been a marked reduction in eurozone rate hike expectations, with forward OIS prices implying year-end rates at 0.91 percent, when at the start of the year they were at 1.40 percent and implying over one full rate hike.
Greek repo markets remained sticky at best, frustrated by a lack of any detail on European Union support proposals, with Icap noting a clear division between trade involving domestic names and those involving only international names. Strategist Chris Clark says there is still scant evidence of any Greek general collateral market existing beyond the one-month maturity for domestic banks and although prices have eased modestly, trade among international banks remains very thin.
Clark said domestic banks are currently looking at a bid/offer spread of around 1.8 percent/1.2 percent in one-month repo, although this is really only indicative given a lack of trade, whereas for international banks that spread is nearer 0.55 percent/0.45 percent.
The broker also says, away from Greece, there has been a pick-up in interest to trade forward starting repo dates, particularly around the middle of the year when the nearly half a trillion euros of ECB one-year funds matures. Collateral has been offered starting at the beginning of July, although so far there is little by way of bids. Three-month euro Libor rates edged off their lows to stand at 0.59969 percent, with equivalent dollar rates unchanged at 0.25000 percent.