A key measure of eurozone money market stress rose to its highest in almost a week on Monday on concerns about the ability of the region's weakling states to raise funds at sustainable levels from capital markets. The premium that London interbank offered rates for three-month euros trade over the three-month Overnight Index Swap rate - a gauge of market stress - rose to 35 basis poitns from 32 bps on Friday, indicating increased strain.
Tensions around eurozone sovereign debt markets mounted, pushing Portuguese and Spanish sovereign bond yields to their highest levels since December 1, after a source told Reuters that Portgual was being pressured into accepting financial aid. The report fuelled investor jitters before Portugal, Spain and Italy test the markets with bond auctions this week.
"We have seen an increase in risk premium at the short end (of money markets) on the back of that. The market is facing a lot of supply this week, not just T-Bills but longer-dated auctions as well," Nick Stamenkovic, a rate strategist at RIA Capital Markets, said.
Traders and strategists said flows in the market for secured lending for Portuguese assets remained minimal, while Irish and Greek repo markets were still all but shut. Copious amounts of excess liquidity in the euro system, meanwhile, kept benchmark euro interbank rates pinned down on Monday, with the European Central Bank sticking to its policy of providing unlimited three-month funds to the region's weaker banks until at least April.
Three-month euro Libor inched down to 0.93125 percent from 0.93188 percent on Friday, according to the British Bankers' Association's daily fixings. The equivalent three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending, and a mix of interest rate expectations and banks' appetite for lending - fell to 0.995 percent, the lowest level since mid-October.
Shorter-term one-week rates held steady at 0.552 percent while overnight rates fixed at 0.380 percent on Friday. The ECB is expected to allot 190 billion euros ($244.7 billion) at its regular seven-day refinancing operation this week, a Reuters poll of money market traders showed, versus 195.691 at last week's operation. The refinancing operations have acted as a liquidity safety net for vulnerable eurozone banks since the onset in 2008 of the financial crisis froze interbank credit markets.