Money markets euribor rates may stabilise around record lows

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* 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.