Overnight Rate Swaps Rise for Second Day After ECB Holds Rates

An estimate of future average overnight borrowing costs in euros rose to the highest in more than a week, extending yesterday’s jump after the European Central Bank kept rates unchanged.

The three-month Eonia overnight indexed swap rose to 8.8 basis points at 1:30 p.m. in London from 7.9 yesterday, according to data compiled by Bloomberg. The measure was about 5.5 basis points before the ECB left its deposit rate at zero and its refinancing rate at 0.75 percent.

“The market’s re-priced after discounting some possibility of a rate cut yesterday,” said Laurence Mutkin, the global head of interest-rate strategy at Morgan Stanley in London. “If you look further out along the forwards you can see that it’s still pricing in a reasonable chance of a rate cut in the near future.”

The ECB doesn’t rule out lowering the deposit rate below zero, though it’s currently “not a practical aspect that is being discussed,” council member Ewald Nowotny said July 25. The euro-region’s lenders still hold 324 billion euros ($397 billion) in overnight deposits at the central bank.

The European Banking Federation’s euro overnight indexed average, or Eonia, of unsecured lending deals was set at a record low 10.9 basis points yesterday from 11.2 basis points the day before.

Overnight Lending

The volume of overnight lending as measured by the EBF in Brussels has declined since the ECB lowered the deposit rate to zero on July 5. About 19.2 billion euros ($23.5 billion) of transactions were recorded in the Eonia market yesterday, compared with a one-year daily average of 28 billion euros.

Three-month Euribor, the rate banks say they charge each other for euro loans, held at a record low 0.375 percent today. The benchmark, which is set by the same panel of banks that contribute to Eonia, is expected to drop to 0.32 percent, according to the implied rate on the Euribor futures contract expiring in September.

The London interbank offered rate, or Libor, for three-month dollar loans was 0.439 percent yesterday from 0.442 the day before, the lowest since Nov. 4. Libor is published by the British Bankers’ Association.

The cost for banks to convert euro interest payments into dollars fell to the lowest in a year. The three-month cross-currency basis swap was 39.5 basis points below Euribor from minus 46 yesterday, the lowest since July 26, 2011. The one-year basis swap was 43 basis points less than Euribor from minus 45.5. A basis point is 0.01 percentage point.

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