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Money markets euribor rates may stabilise around record lows

* Euribor futures suggest rate of 0.64 pct in June, September* Euribor rate falls to lowest since July 2010* Euribor/OIS spreads seen stabilising around 20-30 bpsBy Ana Nicolaci da CostaLONDON, March 22 Bank-to-bank Euribor lending rates fell on Thursday as excess liquidity continued to pressure short-term rates but could eventually stabilise near record lows as the European Central Bank is seen holding interest rates for a while. Three-month Euribor rates fell to 0.817 percent - the lowest since July 2010 - from 0.824 percent on Wednesday. One trillion euros worth of cheap 3-year ECB funding has pulled them back from 1.42 percent where they were before the central bank's first injection in December. Euribor futures show that the 3-month rate should fall to around 0.64 percent in June or September - near record lows of 0.63 percent seen in March of 2010."It seems that June or September Euribor are pricing a level of Euribor which is as low as it can get if the European Central Bank doesn't cut the deposit rate," Corentin Rordorf of Morgan Stanley said.

Since the rate offered at the ECB's deposit facility is currently at 0.25 percent, overnight Eonia rates at 0.35 percent are not expected to ease much further. Given that a three-month borrowing rate has to offer some premium over overnight lending costs, Euribor rates of 0.64 percent, offering roughly a 30 bps premium over the current Eonia rate, cannot fall much further either, Rordorf said. ECB BUFFER

Simon Smith, chief economist at FxPro also saw the 3-month Euribor/OIS spread - a measure of counterparty risk - stabilising around 25-30 basis points, as the ECB is expected to keep borrowing costs on hold for at least the next year. A Reuters poll published last week shows economists expect the ECB to keep interest rates at a record low of 1.0 percent through all of this year and next, after the ECB warned about inflation risks at its last monetary policy meeting."The ECB has been relatively clear, not explicitly saying but giving the impression that it doesn't really have any inclination to move rates lower," Smith added."There's probably a bit further to run in terms of those short-end contracts but not that much further."

The ECB earlier this month raised its forecasts for inflation this year.. Another flare-up in the euro zone debt crisis could cause measures of counterparty risk to widen. Market players are increasingly worried about the fiscal situation in Spain, while they do not rule out further bailouts for Greece and Portugal. Ten-year Spanish/German government bond yield spreads have widened some 40 basis points since the beginning of the week. A widening in the spreads of peripheral debt over their German counterparts could prompt a rise in measures of counterparty risk. But Alessandro Giansanti, senior rate strategist at ING said any impact would be offset by improved funding conditions for banks after the two ECB cash injections, limiting any fall-out. Indeed, excess liquidity in the financial system could take the Euribor/OIS spread as far as 20 basis points, he said."When you know that every bank can access unlimited funding from the ECB, from the national central bank, do you really need (such a big) risk premium in this environment?" he said.

Money markets growing ecb rate cut bets risk falling flat

* Euribor futures rising as speculators bet on dovish ECB* Market exposed to selloff if ECB offers nothing newBy William JamesLONDON, April 3 Expectations that the European Central Bank could signal an imminent interest rate cut on Thursday has left short-term interest rate futures primed for a selloff if the bank's rhetoric falls short. A run of data confirming the euro zone remains stuck in recession, combined with unease after an unprecedented levy on bank deposits in Cyprus has led some to bet on the central bank signalling more monetary easing is in the pipeline.

That has helped push Euribor futures , which generally rise as euro zone interest rate expectations fall, around 5 ticks higher over the last two days and back to levels last seen more than a fortnight ago."Markets seem to be entering the meeting with some expectations of a more dovish flavour in the press conference in light of the relatively weak data we have seen recently," said Luca Cazzulani, deputy head of fixed income strategy at Unicredit. On Tuesday, surveys showed manufacturing across most of Europe's major economies endured another month of deep decline in March, adding extra gloom to an already murky picture.

Nevertheless, none of the 73 economists polled by Reuters on March 27 expected the ECB to cut rates, leaving scope for a correction in short-term interest rate futures if markets see little change in tone."We expect nothing will come in terms of rate changes or unconventional monetary policy... It's slightly more likely that investors who are expecting a cut or a significant step up in dovishness, will again be disappointed," Cazzulani said.

Disappointment could see investors ditch Euribor futures contracts, pushing prices down around 5 to 10 ticks and wiping out recent rises, Cazzulani said. Analysts compared the situation to the March policy meeting when a perceived lack of dovishness from ECB President Mario Draghi prompted those who had taken up long Euribor future positions to sell the contract and drive prices down."(This month) it could be the same as last time if I'm right that he will be very dovish but stop short of indicating any near-term rate cut," said Anders Svendsen, chief analyst at Nordea in Copenhagen."The market is all facing one way... More or less every one agrees that he's unlikely to give anything other than a dovish comment."

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