Repo Rate Curve Inversion Shows Increase in European Bank Stress

The market for borrowing and lending European government bonds, the so-called repo market, is showing increased stress in bank funding as short-term rates exceed longer-term costs by the most since December.

The rate for a one-day euro repurchase agreement, in which a bank or investor borrows money while putting up collateral, is 19 basis points, or 0.19 percentage point, compared with 10 basis points on three-month contracts, European Banking Federation data show. The so-called inverted curve signals strains in bank financing.

The nine basis-point difference between the one-day and three-month repo rates is the widest since Dec. 15, Brussels-based EBF data show. Short-term financing rates are being pushed higher as banks seek top-rated securities for collateral as Europe’s debt crisis continues to roil bond markets.

The cost for European banks to borrow in dollars held at the highest since June 4. The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was little changed at 58 basis points below the euro interbank offered rate at 11:30 a.m. in London.

The one-year basis swap was at 51 basis points below Euribor from minus 52.5 yesterday.

Three-month Euribor rose for the first time in 10 days to 0.653 percent from 0.652 the day before. One-week Euribor fell to 0.321 percent from 0.323 percent. Euribor is the rate banks say they see each other lending in euros and is derived from a survey by the European Banking Federation.


Prices in the forward market for three-month Euribor relative to a gauge of overnight borrowing costs or overnight indexed swaps -- known as the FRA/OIS spread -- were little changed at 28 basis points. The Euribor/Eonia OIS spread was 41 basis points from 43.

The Eonia OIS swap, an estimate of average overnight borrowing costs over the next three months, was little changed at 23 basis points. The measure held below the European Central Bank’s deposit rate of 25 basis points for the ninth day.

Lenders increased overnight deposits at the Frankfurt-based ECB yesterday, placing 773 billion euros ($966 billion) from 747 billion euros the day before.

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