Markets priced in expectations interbank rates would stay lower for longer after the European Central Bank on Thursday slowed its withdrawal of extraordinary support for the banking sector. Euribor futures rose after the announcement, implying rate expectations were being pared back.
The most actively traded March contract was 0.035 points higher on the day at 98.880. One-month and one-week refinancing operations would also be kept at full allotment, ECB President Jean-Claude Trichet said. Speculation the ECB could increase its bond buying had helped to cool the sovereign debt tensions spilling over into money markets, but Trichet gave no indication of a change in stance. Fixed-term and forward overnight rates fell as investors priced out the prospect that the excess banking sector liquidity that has kept a lid on interbank rates would dry up.
Three-month dollar Libor earlier fixed flat at 0.30344 percent, after six daily rises, but showed no let-up in demand for the perceived safety and liquidity of dollar funding and nervousness over dealing with certain eurozone banks. Five-year euro/dollar cross-currency basis swaps - which show the rate charged when swapping euro interest payments on an underlying asset into dollars - eased off their lows, rising 4 bps to -37.25 bps, but remained sharply down on levels seen at the start of November.