Euribor futures contracts edged up on Friday as worries about southern European states' ability to meet fiscal targets while recession bites reinforced expectations the European Central Bank will keep interest rates steady for the foreseeable future.
Euribor futures have recouped some of last week's losses, which were triggered by an upbeat economic assessment by the US central bank, improved German and US data and the ECB's focus on inflation. That optimism cooled this week after weak Chinese and eurozone manufacturing data renewed concerns about a slowing global economy and the ability of southern European states to pay down their massive debt piles.
The Euribor contracts were last up 2 to 5 basis points on the 2013-2014 curve, with the December 2013 at 99.01, having fallen as low as 98.81 last week on outside bets the ECB would hike interest rates by end-2013. Euribors and the Eonia curve show the ECB will keep borrowing costs on hold into 2014. "We're fading the whole move from last week," said BNP Paribas strategist Matteo Regesta.
"The ECB will keep interest rates low and focus on non-standard measures as the financial crisis is feeding back into the real economy," Commerzbank strategists said. Most measures of money market stress eased further on Friday, subdued by the cash-fest from the ECB's injections of one trillion euros of three-year loans since December. Interbank rates continued their downward march, hitting their lowest levels since July 2010 on the cash glut, which has driven three-month Euribor rates down by more than 40 percent since the end of last year. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 0.808 percent from 0.817 percent the previous day, hitting their lowest level since July 2010.
The rate looks poised to break 0.8 percent early next week and futures markets are pricing in expectations it will reach 0.635 percent by mid-June, close to an all-time low of 0.634 percent hit at the end of March 2010. Rates in longer-term maturities also dropped. Six-month rates fell to 1.112 percent from 1.120 percent and 12-month rates dropped to 1.448 percent from 1.455 percent. One-week rates bucked the trend remaining at 0.320 percent, while overnight rates climbed for the first time in over a week to 0.352 percent from 0.348 percent.