Investors priced in higher interest rates for 2011 on Friday after strong euro zone data boosted sentiment, while banking stress test results were not seen altering the long-term trend of rising interbank rates. Market players said activity was subdued ahead of the 1600 GMT release of stress tests results, intended to show how resilient 91 European banks are to economic shocks.
The main moves of the day were seen in Euribor futures, which fell after better-than-expected German Ifo business sentiment survey results, implying investors were pricing in higher interbank rates for 2011. "This move occurred after today's Ifo beat expectations, and there is a general improvement in sentiment," said Benjamin Schroeder, strategist at Commerzbank.
The September 2011 contract was the most actively traded, falling around 6.5 basis points on the day, but remaining within its recent range. The stronger-than-expected data led yields to rise across the German curve, and safe-haven Bund futures to fall on the day.
While question marks remained over how rigorous the tests would be, there was little scope for an outcome that would derail the trend of gradually rising money market rates. "If the results suggest big shortages and a lot of failures, perhaps they could put pressure on some of the money market valuations... but with effectively still-unlimited liquidity on offer from the ECB, you would imagine that would only be temporary," said Sean Maloney, rate strategist at Nomura.
The London Interbank Offered Rate (Libor) for 3-month euro funding rose to 0.82125 percent, up half a basis point to a fresh 11-month high. The equivalent Euribor rate also crept higher to 0.885 percent. Interbank lending rates have been rising as the level of excess liquidity in the European banking system falls following the expiry of a 442 billion euro 12-month tender at the beginning of the month.