News Column

Interbank and Bund rates reach new lows

August 20, 2014

German Bund yields hover just above 1%

Eurozone money market rates fell to new lows on Tuesday and German Bunds held near a record one per cent yield as the region's weak recovery and Russian sanctions reinforced expectations the European Central Bank would loosen monetary policy.

The euro overnight lending rate dipped to 0.006 per cent, hovering just above zero and an unprecedented drop into negative territory.

"I wouldn't exclude the overnight rate dropping below zero, but I find it difficult to see banks charging negative rates on unsecured lending," said Benjamin Schroeder, a strategist at Commerzbank.

The ECB decided in June to charge banks to keep their money in overnight deposits, hoping that this would stimulate lending into the real economy.

Strategists say this policy and the amount of spare cash in the banking system are helping to keep rates near zero. Excess liquidity in the system is likely to remain ample after the ECB's weekly refinancing tender on Tuesday.

Forward money market rates are also at lows, pinned by expectations of a further rise in surplus cash when the ECB starts pumping out new four-year loans from September.

Money market traders now see an even 50 per cent chance of an asset-purchase programme, known as quantitative easing, in the coming year, a Reuters poll found on Monday.

The trend is the same for longer-term rates. Strategists expect Germany to announce later on Tuesday that it will sell a new two-year bond on Wednesday with a zero per cent coupon.

Yields on German 10-year bonds the eurozone benchmark opened at 1.01 per cent on Tuesday, after dipping below one per cent at the end of last week.

Conflict between the Ukrainian government and pro-Russian rebels in the east of the country has led to Russia and the West imposing tit-for-tat economic sanctions.

Those sanctions are tarnishing the outlook for the eurozone, whose economy stagnated in the second quarter. Low inflation is also undermining a fragile recovery.

"What has really driven the market here is poor macroeconomic data, probably compounded by the sanctions and the implication that this might have on economic activity," said RBC's head of European rates strategy, Peter Schaffrik.

Germany's central bank said on Monday the eurozone economy is expected to grow more slowly during the rest of the year than initially thought.

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Source: Khaleej Times (United Arab Emirates)

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