Money markets overnight ecb borrowing jumps but seen temporary

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LONDON, March 13 Borrowing of overnight funds from the European Central Bank jumped as banks prepared to tender new Greek bonds as collateral at the central bank's refinancing operations after the country's successful debt restructure. Borrowing from the overnight facility rose to 15.6 billion euros from 632 million euros the previous day, ECB data showed on Tuesday, but this was largely expected to fall later in the week as they receive cash from the ECB's seven-day tender. The ECB stopped accepting Greek bonds early last week after the country's debt was pushed into 'selective default' as a result of its debt restructuring but lifted the ban after the deal went through at the end of the week."Newly exchanged Greek bonds were waiting to be submitted into today's ECB Main Refinancing Operation and that cash was being borrowed at the marginal rate until such funds are settled tomorrow," ICAP analyst Chris Clark said."If this is indeed what happened, we should see a similar figure being borrowed tonight before that number returns to normal once MRO funds are settled tomorrow," he said.

Bank demand for the ECB's weekly loans also rose to 42.2 billion euros from 17.5 billion euros last week, well above an average of 18 billion euros in a Reuters poll on Monday. This was likely due to banks front-loading funds to meet the level of cash they are required to keep at the ECB at the beginning of its maintenance period. The increase in weekly borrowing was unlikely to have much impact on a market that is already flush with cheap three-year cash from the ECB. Interbank rates hit fresh 17-month lows on Tuesday as the excess liquidity from the ECB's two ultra-long financing operations over the past months exerted downward pressure.

Bank-to-bank lending rates have dropped by more than a third over the last few months as a result of the 1 trillion euros the ECB has poured into the financial markets, and they are homing in on record lows they hit in early 2010. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 0.876 percent from 0.884 percent, the lowest level since September 2010. Equivalent Liobr rates also fell.

Rates in other maturities also dropped. Six-month rates fell to 1.183 percent from 1.193 percent and 12-month rates dropped to 1.519 percent from 1.527 percent. One-week rates, the most heavily influenced by the level of cash in the system, held steady at 0.317 percent. Overnight rates slipped to 0.355 percent from 0.359 percent."With so much excess liquidity in the system, we expect Eonia to continue to trade at an approximate 10 basis points spread to the deposit facility and for Euribor fixings to continue drifting lower as tail funding risks have receded," Morgan Stanley strategist Elaine Lin said. The three-month lending rates have already dropped by over a third since the ECB announced plans to lend banks three-year money back in December, but are still well above the low of 0.634 percent they hit in early 2010.