World finance :: Markets, Business & Earnings

Money markets short term funding conditions improve

* Funding conditions for non-U.S. banks improve * Demand ebbs for 3-month part of Fed's liquidity swap lines * Euribor rates hit 16-month low; may fall to record By Ellen Freilich NEW YORK, March 5 A drop in demand for three-month dollars the European Central Bank auctioned to replace money it lent to European banks in December shows non-U.S. banks' access to short-term funding has improved. The ECB made the loans through the Federal Reserve's central bank dollar liquidity swap program, originally started in December 2007 to address severe strains in global short-term dollar funding markets. Demand in the most recent auction for three-month dollars offered by the ECB through the program fell to less than a third of what it was in December as European banks rolled over just $14.5 billion of the $51 billion in maturing loans. "In December, people wanted to make sure they had dollars for year end, but at the replacement auction, they only replaced about $14 billion of it and the total amount outstanding in the Fed's liquidity program will go down as a result," said Joseph Abate, market analyst at Barclays Capital in New York. The development is consistent with Libor rates, which have been easing, and a rise in both the level and average duration of financial commercial paper outstanding. All the trends suggest the "the sense of urgency about getting dollars has abated a little bit," Abate said. That auction of three-month paper occurred against the backdrop of the ECB's longer-term refinancing operation and augurs well for banking system stability. "The LTROs (Long Term Refinancing Operation) were extremely effective against having another Lehman-type freeze up," said James Kee, chief economist at South Texas Money Management in San Antonio, Texas, refering to the Wall Street investment firm whose collapse in 2008 is thought to have played a major role in the global financial crisis. "We're not out of the woods yet, but I'm hoping market moves (on funding concerns) will become less and less severe as markets become more and more convinced that the global financial system is not at risk of collapse," Kee said. Abate said markets are in a multi-year period where fear intensifies and then settles down again. The Fed re-established its central bank dollar liquidity swap program when funding strains re-emerged in May 2010. The swap lines have been extended several times since then. "The Fed doesn't want its central bank liquidity swap lines to become permanent, but it hasn't been able to build the escape velocity to leave this all behind," he said. "Things start to get better and then some other exogenous shock comes and knocks the market back on its heels again. "You need to get confidence restored so people wouldn't hoard liquidity every time something happens," he said. The ability of European banks to fund dollar-denominated assets they own in the private market has improved and interbank lending rates could keep heading lower as a result, said Pierre Ellis, senior economist at Decision Economics. Euro zone interbank lending rates headed toward record low levels on Monday. But liquidity is not the whole story and thus the declines could start to occur more gradually, Ellis said. "The liquidity issue for European banks has been resolved, but now you're looking at the inherent risk of their portfolios which is tied to the outlook for the European economy," he said. Three-month Euribor fixed at a fresh 16-month low of 93.4 basis points on Monday. The rate has fallen every day since Dec. 19, declining by nearly 50 bps in that period. Euribor futures showed the rate was forecast to be 82 bps at the March contract expiry on March 19. In the U.S. short-term debt markets, prospects for lower repo rates into the end of the month and for reduced bill supply heading into the middle of the second quarter partnered with attractive yields to draw buyers to the Treasury's auctions of three-month bills last week and this week, said Thomas Simons, money market economist at Jefferies & Co. Demand for the six-month Treasury bill auction was less fervent.

Money markets us sells bills at low rates, spanish bank cds falls

* U.S. sells 3-, 6-month bills at historically low rates * Spanish bank default insurance costs ease * Investors worry Spanish bank rescue to push up borrowing costs By Chris Reese and Ana Nicolaci da Costa NEW YORK/LONDON, May 29 The U.S. Treasury sold three-month and six-month bills at comparatively low interest rates on Tuesday, indicating investors remain hungry for lower-risk, short-term U.S. debt amid worries over contagion from Spain's ailing bank sector. The United States on Tuesday sold $30 billion of three-month bills at a high rate of 0.085 percent, unchanged from a similar sale of the bills last week, when the auction rate was the lowest since April 23. A total of $27 billion of six-month bills was auctioned on Tuesday with a high rate of 0.14 percent, which was also unchanged from a similar sale last week which brought the lowest rate since an April 23 auction. While historically low, the auction rates for the bills remain above the lowest levels reached last year. Three-month bills were sold at a high rate of 0.005 percent in December of last year, while six-month bills were sold at a high rate of 0.03 percent in September. Meanwhile, Spanish efforts to recapitalize Bankia, its fourth-biggest lender, have eased pressure on the cost of insuring Spanish bank debt against default - but not for long because the move is seen as further undermining the country's precarious finances. The fate of Spain and its banking system is increasingly intertwined as markets worry that any bank rescue will further drive up national borrowing costs in a vicious cycle. The cost of insuring debt issued by Santander and BBVA fell on Tuesday, having risen in the beginning of May when risk sentiment was also hurt by an anti-austerity vote in the Greek elections. But analysts expect the fall in the cost of insuring Spanish bank debt against default to be short-lived and that spreads will realign with those on sovereign bonds on concerns that Bankia could be just the start of a rolling rescue of an over-leveraged banking system. Bankia's parent company BFA has asked for 19 billion euros in government help, in addition to 4.5 billion the state has already pumped in to cover possible losses on repossessed property, loans and investments. Analysts worry that Spain could eventually be forced to seek an international bailout with unforeseeable consequences for the euro zone and financial markets. A government source told Reuters on Tuesday Spain will recapitalize the nationalized lender by issuing new debt, not by injecting bonds, and will likely adopt on Friday a new mechanism to back its regions' debt. "I guess a couple of weeks ago we didn't have news about this bailout. I am surprised that people have taken it that optimistically. I guess having something injected is better than nothing," Michael Hampden-Turner, credit strategist at Citigroup said. "We are likely to see quite a lot of volatility in the bank CDS premium as the summer goes on. We see some volatility but I think it's probably a temporary thing. I think it's likely to realign (with sovereign CDS prices)." The cost of insuring debt issued by Santander against default fell 11 basis points on the day to 401 bps, while the BBVA equivalent shed 10 bps to 441 bps, according to Markit data. Five-year Spanish sovereign CDS meanwhile flirted with a record high of 560 bps, trading at 556 bps - little changed on the day and up from 508 bps in late April. Ten-year Spanish government bond yields also remained above 6 percent danger levels and not far from 7 percent - a level where Portugal and Ireland had to start considering bailouts. "It seems like (increasingly) the credit risk is being transferred over to the sovereign fundamentally, that's why we have seen Spain hovering near its record wide," Markit analyst Gavan Nolan said. On bank CDS prices, he said: "They had widened out a lot in the previous few weeks. Mainly I think it's a bit of a pull-back from that." The trouble for Spanish banks could worsen if clearing house LCH. Clearnet SA further increases the cost of using Spanish bonds to raise funds via its repo service. Earlier this month the clearer raised the initial margin on two- to 30-year Spanish debt, with the largest move in the 10- to 15- year maturity sector. "Imposition of higher initial margin charges from LCH on Spanish government repo is almost an inevitability now. This may further depress liquidity in both the underlying government bond market and term repo market for Spain," Don Smith, economist at ICAP said.