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Money markets traders positioned for ecb refi rate cut

* Market anticipates ECB rate falling 25 bps to 50 bps* Deposit facility rate expected to remain at zero percent* ECB delay to provoke only limited re-pricing in EuriborBy William JamesLONDON, Sept 3 Money market pricing shows the European Central Bank is expected to cut its refinancing rate to a record low of 50 basis points from 75 basis points on Thursday, but leave its deposit rate unchanged at zero. The ECB is seen in monetary easing mode as it bids to prevent the bloc's economy shrinking further, while it is also expected to unveil details of a new bond buying plan to lower the borrowing costs of the region's embattled sovereignsUnder the auspices of these aims, the refinancing rate at which the ECB lends money to banks is seen falling to a record low 50 basis points, but no further cuts are expected to the deposit rate, which was reduced to zero in July."It's clear that the market is expecting something (for the refinancing rate), but when it comes to the deposit facility rate the market does not believe that the ECB will cut into negative territory," said Patrick Jacq, strategist at BNP Paribas in Paris.

Anything outside this scenario would see markets scrambling to reprice the short-dated rates at which money changes hands between banks but, given the current ultra-low interest rate environment, the magnitude of those moves would be limited. Traditional signals on market expectations of the ECB's main refinancing rate have been obscured by a huge excess of loans by the ECB to the banking sector, but pricing discrepancies show a cut is widely anticipated, analysts said. For example, the current three-month Euribor rate, which is correlated to the ECB rate, last fixed at 27.6 bps, but a futures contract linked to Euribor and expiring on Sept. 17 shows traders expect the daily fixing to fall to 24.5 bps. Similarly, a jump lower over the coming days can be seen in the forward Eonia overnight rate linked to the ECB's Sept. 6 meeting, which is priced at 8.4 bps, 2.5 bps below the current market rate of 11 bps.

However, the ECB's deposit rate -- which determines how much interest the central bank pays on money placed overnight at the central bank -- is not seen making an unprecedented fall into negative territory. Using the rates implied by forward prices and assuming a constant relationship between current market rates and the ECB's benchmark rates, Deutsche Bank sees a 67 percent probability that the refi rate is cut and the deposit rate remains at zero. Their analysis suggests the implied Eonia rate is too high to be consistent with a deposit rate cut and that Eonia would need to be below zero to if both the deposit rate and refinancing rate were expected to be cut.

SCALE OF REPRICING Despite the relative confidence of market participants, economists were less sure of the ECB's actions. A Reuters poll conducted last week showed 36 out of 70 were expecting a refinancing rate cut. If the ECB did disappoint the market on the refi rate cut, Eonia rates would rise by 5 to 6 basis points said BNP Paribas's Patrick Jacq. But, the reaction in longer-dated rates products like Euribor would be limited because keeping rates on hold would only be seen as a temporary delay."As the Euribor strip is already pricing the refi rate at 50 basis points in the medium term, the impact on the futures contracts -- except the September 2012 one -- should be marginal," said Barclays Capital strategist Giuseppe Maraffino in a note to clients. In keeping with this view, the Reuters poll showed a strong consensus for a rate cut by the end of the year, with October the most likely if the ECB does not deliver in September. (Editing by Chris Pizzey, London MPG Desk, +44

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Money markets unusual repo notes demand leads to 7 year special

NEW YORK, Feb 21 Strong demand in the overnight repurchase market for seven-year Treasury notes as collateral in short-term cash loans has driven rates into negative territory, and traders are not sure why. Participants in the repo market exchange cash in overnight loans for securities like Treasury notes. The condition, known as a "special," is the most dramatic seen in the seven-year maturity since the Treasury Department again began issuing seven-year notes in 2009, after a hiatus of more than 15 years. According to Roseanne Briggen, an analyst at IFR Markets, a unit of ThomsonReuters, the rate on seven-years as collateral is between -28 basis points and -35 basis points. That compares to a general collateral rate of between 9 basis points and 7 basis points for other types of securities that are not trading "special." The Federal Reserve's latest easing program, Operation Twist, is the most likely culprit, according to a repo trader at a large Wall Street bank and a money market analyst at another major bank, both of whom declined to be identified. Operation Twist is the Fed's latest attempt to force long-term interest rates lower and stimulate the economy by manipulating Treasury yields. The Fed is selling the short-term Treasuries it has on its books and using the proceeds to buy longer-dated Treasury notes and bonds - including seven-year notes. A few of those most recent purchases may be causing a scramble for seven-year notes by market participants. "We're just wondering if it's a function that the Fed bought too many last month," said the repo trader. As of Jan. 31, the Fed had purchased roughly $61.8 billion in Treasury notes with maturities of between six and eight years since Operation Twist began in October, according to a Barclays Capital analysis of data released by the Federal Reserve Bank of New York. That's roughly 51 percent of the gross issuance in six-to-eight-year maturities, according to Barclays. "The Fed purchased a large amount of the issue and took it out of the market, effectively," said the money-market strategist. The Fed continued buying seven-year notes in February. It would not be the first time a few huge Fed purchases took enough of a certain security out of the marketplace to leave traders scrambling. "It's like last spring when they bought on-the-run three-year notes at significant size, they removed enough of the float that the issue went special," the repo trader said. In the spring of 2011, the Fed was still engaged in its second quantitative easing program, during which the central bank expanded its balance sheet by buying Treasuries across the yield curve to help lower long-term rates. But the "special" in sevens - and a similar condition in five-year notes in the repo market - could also be driven by coming Treasury auctions on Wednesday and Thursday. The Treasury Department is set to sell $35 billion in five-year notes and $29 billion in seven-year notes. Often times, Treasury traders arrange to "short" current issues in maturities that are going to be auctioned soon, effectively setting up a bet that their prices are going to cheapen after the auction occurs and a new issue hits the market. There may be other factors, too. "One of the reasons why the five-year is particularly short, apparently it is a derivative-related short," Briggen said. "I don't know exactly what's entailed, but that's exacerbating the premium." Tom Simons, a money-market economist at Jefferies & Co. in New York, said it might also be reasonable to blame the shortened week following Monday's Presidents Day holiday for some of the strange conditions. "With repo being higher than it was previously since basically the middle of January and this week being kind of a thin week for desks, some dislocations that may not normally be there may be at work," he said. In Europe, extremely strong demand at a sale of six-month Spanish treasury bills on Tuesday suggested banks may take a sizeable amount of three-year funds from the European Central Bank next week. Demand at Tuesday's auction for the bills, which can be used as collateral at the longer-term tender, was more than 10 times the amount on offer, up from seven times a month ago . Spanish debt sales this year have been strongly supported by domestic banks, as have Italian auctions to a lesser degree, enabling the former to complete around a third of its 2012 borrowing target already. Shifts in demand at the ECB's one-week and one-month tenders last week also reinforced expectations of a large take-up. Banks cut their intake of one-month funds to 14 billion euros from 39 billion euros in the previous tender, but raised their demand for one-week loans to 143 billion euros from 109 billion. That figure rose again on Tuesday with banks taking 166.5 billion euros in seven-day funding to increase gross liquidity in the banking sector to more than 875 billion euros, according to Morgan Stanley. The latest Reuters poll, released on Monday, pointed to a take-up of almost half a trillion euros of three-year money, around the same amount as in December. Around 100 billion euros of that will be rolled out of existing shorter-dated operations, Morgan Stanley calculates.

Money markets us repo rates dip ahead of auction announcement

NEW YORK/LONDON, Aug 17 Overnight general collateral repo rates eased on Friday as investors looked ahead to the announcement next week of U.S. government debt auctions to be held in late August. The U.S. Treasury is scheduled to auction two-year notes, five-year notes and seven-year notes on Aug. 28, 29 and 30 respectively. The announcement of the size of the auctions is scheduled for Aug. 23. Settlements for such auctions can put upward pressure on general collateral rates in the days following the sales. The rate on repos secured by Treasuries dipped to 22 basis points on Friday from 24 basis points on Thursday. The repo rates have generally been trending higher since touching a recent low of 0.03 percent over a year ago. Meanwhile in Europe, chartists saw no immediate threat to this year's rally in Euribor futures and expect the contracts to grind gradually to new highs. For market participants looking at the fundamental picture rather than chart patterns, this corresponds to expectations the three-month euro zone interbank Euribor rate will settle lower. The higher the price of Euribor futures, the lower Euribor is expected to settle. Euribor is a gauge of unsecured bank-to-bank lending and European Central Bank rate expectations. Falling Euribor rates would imply expectations of ECB monetary policy easing. The Dec. 2012 Euribor contract on Friday traded 2 ticks higher at 99.76, implying expectations that the three-month Euribor rate will settle at 0.24 percent in December, compared with a record low of 0.334 percent hit on Friday. The contract could rally to levels implying single-digit rates, according to Alan Collins, a partner at 3CAnalysis in London. "There is no clear signal that the trend would reverse," Collins said. "We've had a higher number of higher highs and higher lows than otherwise." He said the 99.795 percent record high hit on July 27 -- the day after European Central Bank President Mario Draghi said he would do whatever it takes to preserve the euro -- was the immediate target. Above that, the contract was likely to attempt to rise to 99.84 and then to 99.93 -- the first two Fibonacci projection levels of the rise from June's lows to July's record high. The December 2013 contract is likely to follow a similar pattern, Collins said, although the 10-12 tick spread between the two is likely to remain intact, so the next target on its rising trend would be 99.74. "The trend (for the Dec. 13 contract) is exceptionally strong at the moment," said Cilline Bain, technical analyst at Credit Suisse in London. "There is really no risk of that turning sour." The "game changer", Bain said, was the contract's bounce on Thursday from 99.595, which was bang on the trend line set by the lows going back to April 2012. A fall below that line would have been a first warning signal for the rising trend.

More erste clients exit swiss franc loans

VIENNA Aug 17 Around a quarter of Austrian lender Erste Group Bank's customers with Swiss franc-denominated loans have now switched to euro financing or to loans that amortise rather than come due upon maturity, its the Vienna-based lender said on Friday. The Swiss franc's strength amid the euro zone debt crisis has made it more expensive to service such loans, prompting banks to suggest customers swap out into more conventional domestic financing to avoid currency risk. Erste said a campaign it has run since last autumn had persuaded more than 2,500 customers to switch out of foreign currency mortgages worth around 400 million euros ($495 million).

Another 1,500 foreign currency borrowers had converted loans repayable upon maturity into amortisation loans worth around 270 million euros, it said.

Nearly one in every four private loans in Austria are denominated in foreign currency, with just over 34 billion euros outstanding in Swiss franc loans held by private individuals, it said. Many borrowed in francs to tap low interest rates for mortgages.

At Erste Bank around 14,000 private individuals still have 2 billion euros worth of foreign currency loans. The average loan was around 150,000 euros.