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Euro-Area Money Market Rates Approach Zero as ECB Plan Permeates

A gauge of overnight borrowing costs in euros fell to a record low as the European Central Bank’s penalty charge on deposits damped money-market rates.

The euro overnight index average, or Eonia, fell to just above zero, signaling banks would receive almost no interest for making the loans. Borrowing costs are tumbling after the ECB lowered its deposit rate to minus 0.1 percent on June 5 in an attempt to boost the flow of cash into the economy and stave off the threat of deflation. German 10-year bunds slipped today, paring a weekly advance. Italy’s bonds declined as the nation sold securities in an exchange auction.

ECB policy makers “have achieved what they needed to achieve on rates with the amount of excess liquidity they’ve got in the market,” said Peter Osler, head of rates strategy at Marex Spectron Group Ltd. in London. “So long as they keep this sort of excess liquidity in the market, the Eonia rate will stay down here. The implication if it stays like this is that market volatility will stay low.”

The Eonia index rate was set at 0.01 percent after markets closed yesterday, versus an average for this year of 0.19 percent and a record high of 5.75 percent in April 2001. Lower money-market rates may translate into reduced borrowing costs for companies and households across the euro area.

Bund Yields

German 10-year yields increased two basis points, or 0.02 percentage point, to 1.35 percent at 4:27 p.m. London time, leaving them two basis points lower for the week. The 1.5 percent security due May 2024 fell 0.22, or 2.20 euros per 1,000-euro ($1,358) face amount, to 101.425.

The yield on two-year German notes was little changed at 0.04 percent after dropping to 0.022 percent on June 16, the lowest level since May 2013.

The ECB’s stimulus measures could be enhanced further with asset purchases, Executive Board Member Benoit Coeure, who is responsible for market operations, said today.

“It is possible, it is in the toolbox, but it is not needed today,” he told reporters in Luxembourg. “The measures we’ve taken two weeks ago, they’re really meant to accelerate inflation coming back to 2 percent by injecting liquidity, by providing a clear predictability of rates being low for a very long period of time, and by improving credit to the economy.”

The Rome-based Treasury sold 2.23 billion euros of March 2022 bonds, missing the maximum target of 2.5 billion euros. Italy also repurchased 2.6 billion euros in securities maturing in 2015 and 2017.

The nation’s 10-year yields rose three basis points to 2.95 percent. Equivalent-maturity Spanish yields climbed one basis point to 2.72 percent.

The ECB said today banks will repay 12.618 billion euros of three-year loans alloted as part of its longer-term refinancing operations. That’s the highest amount since March 26 and compares with a repayment of 5.8 billion euros announced last week.

German bonds returned 4.3 percent this year through yesterday, Bloomberg World Bond indexes show. Securities across the euro area earned 6.7 percent as those of Italy rose 8.4 percent and Spain’s gained 9.2 percent.

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