Money markets eonia rates may resume fall after repayment no2

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* Forward Eonia rate rises but seen falling* Longer-dated overnight rates come off highs* Repayment of second batch of ECB loans may push rates lowerBy Ana Nicolaci da CostaLONDON, Feb 13 Longer-dated overnight rates have come off recent highs and could see further downside after the announcement of the first repayment of the second round of European Central Bank loans next week. Money market rates rose in late January after the ECB announced euro zone banks would repay 137 billion euros of the cheap ECB funds that have kept the financial system afloat - more than the around 100 billion euros markets had expected. This time, money market traders in a Reuters poll are forecasting the ECB will announce on Feb. 22 that banks will pay back 125 billion euros of the ECB's second tranche of three-year loans at the first opportunity on Feb. 27. If banks pay less or even if the repayment comes in line, analysts expected longer-dated overnight rates could fall further.

"If you took a certain amount in the first and a certain amount in the second, in essence you can be effectively paying off what you took in the second by just paying back a bit more in the first," Simon Peck, rates strategist at RBS, said."There may well be a downside surprise in terms of what we get allotted."Eonia forwards that show where markets expect one-year Eonia rates to be in one year's time rose to 0.43 percent on Wednesday from around 0.40 percent the previous day but were off the 0.53 percent hit on Jan. 30, the day that the first repayment took place. Peck said the announcement of a smaller-than-expected allotment could see those rates fall to the mid 0.30 percent levels.

While a bigger-than-expected reimbursement would also lead to some market volatility, he expected the impact to be more muted because the excess liquidity in the financial system was not seen falling enough to have a lasting impact on overnight borrowing costs. ECB President Mario Draghi last week said he would monitor money markets to ensure policy remains "accommodative".  He estimated that even after the initial repayments of the second of the ECB's loans, excess liquidity would not drop below 200 billion euros - the level at which overnight borrowing costs typically begin to rise. Excess liquidity currently stands at 497.4 billion euros."I think liquidity will stay sufficient to keep fixings soft," Peck added.

Eonia rates with maturities of six months to two years could correct lower after the repayment was announced, Giuseppe Maraffino, fixed income strategist at Barclays, said. Maraffino forecast the first repayment of the second round of ECB 3-year LTRO (long-term refinancing operations) to be broadly in line with the first pay-back of the first round of ECB loans."The second repayment will not be big enough to have a significant impact on the liquidity conditions ... so this means that the impact on the Eonia fixing should be negligible," Maraffino said. Overnight Eonia rates last fixed at 0.07 percent. Given their expectations that the Eonia fixing would remain below 10 basis point in the coming reserve periods, Maraffino said the Eonia curve was still too steep."Probably after the repayment, if it is in line with our expectation, with liquidity surplus remaining abundant... (there) is likely to be a further decline on the Eonia curve," he added. Longer-term money market rates, which fell after Draghi's comments, were little changed at around 0.17 percent on the one- year Eonia contract and up slightly on the two-year contract at 0.28 percent.

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