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Money markets bearish short term us rates move could take time


short-term interest rates could take longer than expected if a rally in stocks and other risky assets peters out on worries about the global economy due to the festering debt problems in the euro zone. Greece's shaky finances moved back into the spotlight on Wednesday as international lenders admitted to difficulty in working out how to solve the country's three-years-old-and-counting debt crisis while rioters and police clashed in the streets of Athens. Violent protests in Spain also piled pressure on Spanish Prime Minister Mariano Rajoy to ask for a bailout, with investors unsure how quickly he could bring such a request to European partners. While RBS analysts wrote that they still have "a bearish outlook for rates over the medium term (3-6 months)" on poor technical conditions in U.S. Treasuries, they noted that a recent risk rally appears to be losing momentum.

The S&P 500 index, for example, has slid for the past five sessions."Of immediate concern is that medium term (weekly) charts of key risk markets are not only looking tired, but many are hinting at the beginning of new bear moves," wrote William O'Donnell, John Briggs and Gabriel Mann of RBS. If the risk rally since early June is indeed taking a breather, the "wait for signs that the oversold correction in Treasuries has run its course could be a long(er) one than imagined earlier," they wrote.

In unsecured lending, the London interbank offered rate, or Libor, on three-month dollars slid to 0.36225 percent, its lowest in a year, from 0.36350 percent on Tuesday. The rate has sunk almost steadily for about three months, and is well off the 0.58100 percent at the end of last year.

EUROPEAN BANKS Euro zone banks have cut their borrowing from the European Central Bank as confidence slowly creeps back into the embattled financial sector and reduces the desire to hold large liquidity buffers. Bank borrowing fell by 7.6 billion euros at the ECB's offer of three-month cash on Wednesday, contributing to a 40 billion decline in excess liquidity in September, according to Reuters data. Banks still have loans outstanding from the ECB of a huge 739 billion euros above their estimated needs but that amount is edging lower as the latest plans to defuse the euro zone debt crisis improve the outlook for financial institutions.

Money markets deposit rate uncertainty opens trade opportunity


* Prospect of negative deposit rate still on table* Market pricing suggest 20-30 pct chance by early 2013* Lack of clear consensus drives trading strategyBy William JamesLONDON, Sept 17 For euro zone money market traders, one big question is driving prices: will the European Central Bank cut the rate it pays on overnight deposits below zero?The answer has major implications for funds that specialise in eking out a return through short-term lending while keeping risk at a bare minimum for their investors."If you lower the deposit facility below zero it will have an amplified effect on all money market papers -- especially those with higher rating -- and will increase the struggle of funds to provide yield to their investors," said Alessandro Giansanti, strategist at ING in Amsterdam. But, for investment banks trading in short-term instruments, the uncertainty has generated a potentially profitable pricing discrepancy.

The Eonia lending rate, the price the market pays on overnight loans, is heavily influenced by the deposit rate and current levels suggest modest expectation of a cut. Citigroup strategists say that based on forward contracts there is a 20 percent chance of a cut priced in by February but highlight that the calculation is far from clear because deposit rates have never before fallen below zero in the currency bloc. Among factors muddying the waters, a cut to below zero could see correlations used for forecasting break down, the central bank could take unforeseen unorthodox policy steps or liquidity could drain from the market and generate volatility.

Using a different forecasting methodology, JPMorgan strategists see the current probability of a cut at 9 percent for next month, rising to 28 percent for a cut in January, while Barclays Capital say the ECB is unlikely to venture into uncharted waters and do not foresee negative rates. RISK REWARD The lack of consensus is reflected in the wide range of strategies banks are devising to profit from the likely shifts in pricing over the coming months as the ECB lays out its policy.

ECB President Mario Draghi gave little away at his September news conference, prompting bets that would profit from a cut to be pared back, but Governing Council member Ardo Hansson subsequently brought the issue back to the fore, saying the bank should carefully consider the pros and cons of negative deposit rates. ING's Giansanti said a failure to cut in October would support those who think the ECB will never go below zero. Consequently, current rates of 8.5 basis points on forward contracts between October and December looked too low compared to Eonia fixings around 10 bps. Conversely, after the recent rise Commerzbank strategists see potential for Eonia rates to fall again and recommend a short-term tactical trade to receive the current interest rate of 5.75 basis points on the March 2013 forward contract"The re-pricing of the Eonia curve continued to an extent where we now see better chances in receiving Eonia forwards," said Commerzbank's Christoph Rieger. For Citi, the 1.36 percent rate on a three year Eonia contract with a start date one year from now is an attractive way to play out the uncertainty."This trade profits - of course - from a rate cut scenario as well in a situation of long-term unchanged rates, in which the market is desperate to grab the additional yield in forward space," the bank's strategists said in a note.