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Money markets repo rates firm before us holiday


* Repo general collateral rates high before holiday* ECB rate cut bets remain after EU summit outcome* Rate cut expectations based on weakening economyBy Ellen FreilichNEW YORK, July 3 Repo general collateral rates remained high o n T uesday before the Fourth of July Independence Day holiday following the previous day's settlement of last week's Treasury note auctions. Repo rates traded between 25 basis points and 27 basis points, said Roseanne Briggen, market analyst at IFR, a ThomsonReuters unit. A premium in three-, 10- and 30-year bonds was "linked to the usual repo play" at this juncture in the monthly Treasury auction cycle, she said. The last group of Treasury auctions just settled and terms of the next batch - re-opened auctions of 10- and 30-year Treasuries, and the sale of new three-year notes - will be announced on Thursday.

On Tuesday, the Treasury sold $30 billion in four-week bills at a high rate of 0.075 percent, awarding 6.93 percent of the bids at the high. The value of bids received over those accepted, the bid-cover ratio, was 4.65. Key euro zone bank-to-bank lending rates fell to their lowest level in more than two years as the view firmed that the European Central Bank would cut interest rates this week."The markets are assuming that the ECB will cut the refi rate 25 basis points this week, given the sharp drop in global manufacturing and German exports and inflation," said Kathy Jones, fixed-income strategist at Charles Schwab. "The only surprise would be if they didn't cut rates."The ECB meets on Thursday to decide on the euro zone's interest rates and 48 of 71 economists in a Reuters poll expect the bank to cut rates below the current record low of 1.0 percent.

A key question for short-term market interest rates is whether the bank will also cut its overnight deposit rate, now at 0.25 percent. The rate acts as a floor for money market rates and cutting it would give bank-to-bank rates further room to fall. Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, slipped to 0.650 percent from 0.652 percent, the lowest since April 2010. Other key rates also decreased. Six-month Euribor rates fell to 0.926 percent from 0.928 percent and shorter-term one week rates dipped to 0.319 percent from 0.321 percent.

Overnight rates fell to 0.329 percent from 0.382 percent after banks settled their end-of-quarter accounts. Dollar-priced three-month bank-to-bank Euribor lending rates edged up to 0.991 percent from 0.984 percent, while overnight dollar rates ticked up to 0.345 percent from 0.344 percent. ECB policymakers have given fresh hints in recent days that the bank could cut interest rates, a move that would open up room for a further drop in market rates."There is no doctrine that interest rates cannot fall below 1 percent," ECB Chief Economist Peter Praet said last week. High excess liquidity in the banking system - now at 798 billion euros, according to Reuters calculations - also puts downward pressure on market rates. The sharp fall in euro-priced interbank rates over the last half-year has brought benchmark euro-priced three-month rates to within touching distance of a record low of 0.634 percent hit in early 2010. Three-month Libor was set at 0.04606 percent, unchanged for the sixth consecutive session.

Money markets spanish bond shortage distorts repo


* Spanish bond shortage distorts repo market* Italian rates rise but market still functioning* Interbank cash rates fall on rate cut expectationsBy Kirsten DonovanLONDON, June 18 A lack of available Spanish government bonds, due to so many being used to obtain funding at the European Central Bank, is distorting pricing in repo markets and causing investors headaches as they seek to cover hefty short positions. As international investors sold Spanish government bonds this year, domestic banks bought them and parked them at the ECB in return for funds - particularly during the two recent three-year funding operations. As a result, investors who need the bonds because of their own short positions must pay a premium for the paper. When this happens in repo markets - where banks commonly use government bonds as collateral to raise funding - bonds are said to be trading "special". Effectively, the investor who needs the bonds pays a premium to their counterparty in the trade - the opposite of a typical repo trade where the party borrowing cash pays the premium.

"There's some good evidence of a collateral shortage out there," said ICAP rate strategist Chris Clark. "Quite a lot may be being used at the ECB and the market short (positions) out there will be increasing the demand for specific bonds."It is the opposite of what might be expected when a country's debt comes under pressure. Then counterparties are usually more reluctant to be left holding the bonds."The collateral just isn't there. That's one of the problems and the few bonds that are still available are highly sought after by people who want to cover their short positions," said Commerzbank rate strategist Benjamin Schroeder. Ten-year Spanish government bond yields have risen more than 130 basis points since the start of May, while two-year yields are up over 2 percentage points.

That prompted international clearing house LCH. Clearnet SA to increase the cost of using Spanish bonds to raise funds via its repo service last month. Analysts said their trading desks had since seen volumes over the platform drop."It's a further segregation of European money markets, where banks are retreating from central clearing houses and going back to domestic clearing or bilateral agreements," Schroeder said. As the euro zone debt crisis intensified this month, mainly due to worries about Spain's banking sector, Italian general collateral (GC) repo rates, paid to borrow funds against a basket of government bonds, have been pushed higher. There is little trade in the Spanish general collateral market but banks are still able to borrow using Italian bonds as collateral, despite Italy being seen as vulnerable to contagion from worries about Spain.

Three-month Italian GC rates rose to 0.42 percent at the end of last week, compared to the Eonia overnight rate at around 30 basis points, according to ICAP. The Italian rate had traded below Eonia from the time of the ECB's second three-year funding operation at the end of February until the end of May."There's been a rise in Italian general collateral rates, both outright and relative to the Eonia OIS curve," ICAP's Clark said. "Despite a reduction in the amount of term activity that goes on, the Italian market is still very much functional."RATE SPECULATION Three-month Euribor interbank lending rates eased again, hitting their lowest since the second quarter of 2010 as speculation grew the ECB may cut interest rates. ECB president Mario Draghi heightened expectations the bank could cut interest rates or take further policy action soon after saying on Friday that the euro zone economy faced serious risks and no inflation threat. September and December Euribor futures contracts rallied to contract highs, pushing implied rates lower. Markets are pricing in a 50 percent chance of a 12.5 basis point cut in the ECB's 0.25 percent deposit rate this year, and a 25 percent of the rate being cut to zero, according to RBS.