Euro interbank lending rates edged up on Monday as the market focused on how much weekly ECB funding banks will roll at the first tender operation since last week's repayment of almost half a trillion euros.
Banks are holding just short of 275 billion euros of short-dated cash that will mature this week, 111 billion euros of which was taken up by borrowers in 6-day funds as they repaid the one year money. The rest is the maturing amount at the European Central Bank's regular weekly tender.
The amount rolled -- allocations will be decided on Tuesday-- will be a key factor in determining excess liquidity in the
banking system going forward and hence the level of overnight lending rates EONIA= and short-dated money market rates.
We are biased towards a lower number, although this is unlikely to change much the liquidity surplus situation which is still very large at around 175 billion euros, said Laurent Fransolet, rate strategist at Barclays capital.
A much lower take-up, although not seen likely, could indicate banks were less reliant on ECB funds than currently appears to be the case.
Banks currently have 455 billion euros of ECB cash up to the three-month tenor when market rates out to that maturity are below the central bank's one percent charge, Commerzbank says.
Traders meanwhile, said interbank lending activity remained thin, especially with U.S. markets closed on Monday.
Those that took three-month money (last week) don't want to lend it out again, said a trader, adding that bids for interbank cash were creeping higher although there was still a lack of offers.
Eonia overnight lending rates fixed at 0.44 percent on Friday, compared with around 0.34 percent before the one-year tender matured last week, despite the still ample amount of excess liquidity in the system. Analysts said the tick up in the Eonia rate was partly due to the maturity of outstanding liquidity dropping sharply, with nearly 40 percent now in one week funds.
While excess liquidity remains ample, it is now also less stable, said Luca Cazzulani, rate strategist at UniCredit. Investors will start to discount the possible drop in excess liquidity and this should put some pressure on longer dated OIS (overnight indexed swap rates), he added.
Markets still have a long way to go however until the Eonia rate comes close to the ECB's main refinancing rate, currently one percent, as was the case before the financial crisis.
According to Commerzbank, market expectations are still only for Eonia only to reach one percent in December 2011, compared with the first quarter of 2012 before last week.
Benchmark three-month euro Libor rates EUR3MFSR= fixed over a third of a basis point higher at 0.73063 percent, the highest in nearly 10 months, with equivalent dollar rates USD3MFSR= slightly lower at 0.53125 percent.
UniCredit's Cazzulani said the bank expected three-month Euribor EURIBOR3MD= rates -- currently 0.793 percent to inch up to 0.85 percent by September, stabilise for a quarter and then reach the same level as the 1 percent refinancing rate.