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Money markets money funds soothed by lack of fed rate cut talk

* Money funds seen disrupted by any cut in rates on excess reserves * Euribor rates hit new record lows after ECB cut By Chris Reese NEW YORK, July 11 Money market fund managers breathed a sigh of relief on Wednesday after minutes from the Federal Reserve's June policy meeting showed no indications the central bank was considering cutting the interest rate it pays on excess reserves to banks. Many fund managers believe any cut in the rate, which currently stands at 0.25 percent, would cause disruptions in funding markets, especially money market funds. Minutes from the Fed's June meeting, released on Wednesday, showed the central bank was open to the possibility of buying more bonds to stimulate the economy, although the recovery might need to weaken for a consensus to build. The minutes did not include any discussion of a possible cut in interest rates the Fed pays on excess reserves on banks. Such a cut has been posited as an economic stimulus option for the central bank, as it would then be less profitable for banks to leave their excess reserves with the Fed, and might encourage banks to make more loans and invest in higher-yielding securities. But some analysts believe any cut in the interest rate would hurt money market funds. "Money funds are prohibited from buying assets with negative yields. So what would they buy if interest on excess reserves was lowered and caused all market rates to move to zero percent or less?" asked Joseph Abate, money market strategist at Barclays Capital in New York, adding "they would have to close shop." Meanwhile, in Europe, euro-zone bank-to-bank lending rates hit new all-time lows on Wednesday, as the European Central Bank's move to cut its main refinancing and deposit rates to historic lows weighed on market rates. The ECB's overnight deposit rate, which it cut to zero on Thursday, acts as a floor for money market rates as banks only lend to rival banks if they are able to earn a better rate of interest than at the ECB. The ECB hopes its unprecedented move, which means banks will now get nothing if they park their spare cash with the central bank, will boost interbank lending by forcing banks to look for more profitable options. Although some money market experts fear the cut could backfire and kill off parts of the market, the move has had an immediate impact on bank-to-bank rates. Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, on Wednesday hit a new all-time low of 0.512 percent, down from 0.521 percent. Other key rates saw similar drops. Six-month Euribor rates fell to 0.795 percent from 0.805 percent and shorter-term one-week rates decreased to 0.145 percent 0.158 percent. Overnight rates which do not yet factor in the benefit of the ECB's cut - coming into force overnight Wednesday - inched down to 0.323 percent from 0.325 percent. Euribor rates are caught up in a manipulation scandal centered on the counterpart Libor bank-to-bank rates, after it emerged a number of banks were falsely submitting the rates they pay to the committee that aggregates the data. Dollar-priced three-month bank-to-bank Euribor lending rates < also fell on Wednesday, dropping to 0.97571 percent from 0.978 percent, with overnight rates falling to 0.34286 percent from 0.346 percent. Euribor rates are well above the euro-priced Libor rates, one reason being that Euribor figures include prices from more of Europe's struggling banks than Libor.

Money markets short term euro rates fall on deposit rate cut bets

May 2 Short-term euro money market rates fell on Thursday after European Central Bank President Mario Draghi said the bank was ready for a move to a negative deposit rate. Draghi said the ECB was "technically" ready to cut the rate it charges banks to keep cash at the central bank overnight to below zero - a move that would effectively penalise them for hoarding cash and not lending it to other banks or businesses. He said several unintended consequences of such a move were possible, but the ECB would cope with them if it decides to act. Euribor futures rose 3-5 ticks across the 2013 and 2014 strips, indicating expectations that the benchmark bank-to-bank three-month Euribor rate - a gauge of expectations of future official interest rates and liquidity conditions - will settle at lower levels than initially thought over the period."We definitely seem to be a lot closer to going negative than markets initially thought," said David Keeble, global head of fixed income strategy at Credit Agricole.

"His (deposit rate) comments definitely set the cat among the pigeons. He was quite aggressive and had a very dovish sounding tone."Keeble did not expect Euribor futures to rise much further, saying markets were likely to wait for the next inflation data before gauging whether and when the ECB could make such a move.

OCTOBER/NOVEMBER Forward euro overnight Eonia rates dated for future ECB meetings dropped by up to 3 basis points across the same strips, with the lowest point on the curve oscillating between October and November at around 0.03-0.04 percent.

Eonia rates have traded about 8 bps above the deposit rate in recent months, meaning money markets are pricing in a slight chance of a deposit rate cut in October/November."That makes sense. The ECB still expects a recovery in the second half ... and if we don't see any signs of that by autumn we could see a move in the deposit rate," said Anders Svendsen, chief analyst at Nordea in Copenhagen. Draghi's mention of unintended consequences also suggested the ECB was unlikely to cut the deposit facility rate - effectively a floor under money market rates - any time soon. Low money market rates may reduce banks' incentive to lend to each other. Some U.S. money market funds restricted lending to European banks last year when talk first emerged about the possibility of a deposit rate cut."I guess the ECB is still afraid of draining the money market completely. It's worried about money market funds and potentially about taxing the banking system, which is one way of looking at