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Money markets surprisingly high ecb repayment jolts rates higher

* Banks to repay 137 bln euros next week* Higher-than-forecast figure bumps up money market rates* Excess cash could be kept high by ECB weekly operationsBy Emelia Sithole-MatariseLONDON, Jan 25 Short-term money market rates rose on Friday after euro zone banks said they would repay more of the cheap European Central Bank funds that have kept the financial system afloat than the markets expected. Banks plan to return 137 billion euros of the 490 million the ECB handed out in late 2011, the central bank said, beating average estimates on the early repayments of around 100 billion euros in a Reuters poll early this week. Euribor futures , which price in expectations of where the market expects interbank rates to be in future, fell across the 2013-2015 strip, with longer-dated contracts falling as much as 12 basis points on the day, pushing their rates up. Short-dated German bond yields rose to a 10-month high of 0.28 percent, briefly above U.S. counterparts. Overnight Eonia forward contracts, which lock in an overnight borrowing rate over a longer period, jumped across the 2013 curve, with one-year Eonia back at a six-month peak of 0.22 percent.

Many in the market expected short-term rates to remain elevated or even go higher in coming weeks as markets price in the possibility that excess cash may start to dwindle more than expected if banks pay back big chunks of the total 1 trillion euros the ECB handed out in later 2011 and early 2012. Spot overnight rates are expected to remain at their ultra low levels, however, given the belief there will still be enough cash in the system through 2013 to keep them anchored near the ECB's zero deposit rate which acts as a floor for the market."Today's number...shows that the repayment is not only coming from core banks... Given that Italian and Spanish banks took a majority of the funds, they could be repaying some too," said Alessandro Giansanti, a strategist with ING."That's a point that could drive the total repayment north of the 300 billion euros total expected (for 2013) and that could start to have meaningful effect on the excess liquidity in the system that's why we expect further steepening on the money market curve," he said.

Historically money market rates, which effectively underpin what banks charge firms and consumers for loans, only tend to move freely once excess cash drops below 200 billion but the lengthy repayment timeline has left them in uncharted water. ECB WEEKLY FUNDS KEY Anything higher than the 300 billion euro initial estimated payback this year would more than halve the amount of so-called "excess liquidity" sloshing around the system that has kept bank-to-bank lending rates pinned at record low levels for almost a year.

However, that surplus was likely to remain above the 200 billion mark with many in the market expecting some banks, especially from the euro zone's weaker periphery, to roll over the longer-term financing into the ECB's three-month tenders"The high liquidity surplus, along with the ECB's commitment to support banks maintaining the 'fixed rate full allotment' procedure at its refinancing operations, should limit any possible widening," BNP Paribas stragesists said in a note."However, the market is likely to remain sensitive to the next announcement and therefore, volatility on EONIA rates, especially at the medium/long tenors, is likely to remain high."The ECB announcements give no detail on which banks are repaying the funds early, but some market participants said Friday's number indicated some banks from Spain and Italy - who took the lion's share of the initial ECB funds - might be prepaying too. Confirmation of this could lift confidence in the market that some those ailing banks were finally weaning themselves off ECB life support and back onto private lending markets."From a fundamental perspective, how positively we would interpret more aggressive LTRO repayments would depend on which banks are repaying the loans. Accordingly, we are reluctant to read too much into today's aggregate data," said Michael Symonds, financials credit analyst at Daiwa Capital Markets."More important will be the granular detail regarding the repayments - by country and by institution - that will filter through in the coming weeks."

Money markets us money markets quiet before weekend

(Adds U.S. money markets) * Money markets focus on next week's U.S. payrolls report * General collateral repo rate could firm Monday * Euribor rates fall under weight of ECB cash By Ellen Freilich NEW YORK, April 27 U.S. money markets were quiet on the last trading session of the week, having digested the Federal Reserve's policy statement on Wednesday and now positioning for the influential U.S. payrolls report due next Friday. "The markets are deadly quiet," said Ken Silliman, managing director at TD Securities (USA) LLC in New York. "The FOMC (Federal Open Market Committee) meeting was the big event of the week that the market was preparing for, and after that there hasn't been much to discuss so the market has been positioning for non-farm payrolls," he said. The U.S. Labor Department will release its April employment report on May 4. Silliman cited some buying interest in nine- to 12-month agencies "which offer a slightly more attractive yield for some market investors at this point. "And we've also seen some foreign central bank buying of very short-dated Treasury bills," he added. But volatility "in the money market world has been surprisingly absent." Barclays Capital market analyst Joseph Abate said there had been no impact from Standard & Poor's downgrade of Spain's debt on Thursday, its second downgrade of Spain this year. Instruments maturing in two years or less time are "just not moving," Silliman said. "All the action is farther out on the curve: five years through 30 years." General collateral repo rates that were elevated earlier in the week due to principal and interest payments made on April 25 by Fannie Mae had stabilized around 14 basis points, he said. Settlement of Treasury supply on Monday and month-end positioning could push repo rates higher early next week, "but by the middle of next week, we expect general collateral rates to start trending lower again," Silliman said. Key euro zone bank-to-bank lending rates sank to 22-month lows on Friday amid the ample cash the European Central Bank has provided to the financial system since late last year. The ECB, which left official euro zone interest rates at 1.0 percent earlier this month, has put more than 1 trillion euros of low cost, three-year funding into the banking system since the end of December, cutting interbank rates to half of what they were last August. 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 their lowest level since June 2010. The 0.25 percent the ECB offers banks for overnight deposits continues to act as a floor for money market rates. With the ECB expected to keep limit-free liquidity available and interest rates at their record low for the foreseeable future, further falls in Euribor rates are expected. High excess liquidity in the banking system has led to high use of the ECB's overnight deposit facility. Banks parked 791 billion euros there on Thursday. In normal times the amounts are minimal.