Eonia Mystery Deepens Despite No Sign of Wider Funding Woes

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(Bloomberg) -- A second daily surge in Europe’s overnight benchmark rate, which banks use to provide loans to one another, sparked widespread speculation among traders about the trigger, though there were no signs of wider funding stress.

Some traders attributed the jump in the Eonia rate to possible year-end funding squeeze at some lenders, while others pinned it down to demand related to Greece’s just-concluded bond swap. Even though there hasn’t been a convincing explanation, “it could be down to a month-end distortion at some bank,” Commerzbank AG said.

Still, Europe’s wider money markets took the unusual jump in the region’s overnight lending rate in their stride. Data on Friday showed that demand for emergency funding from the European Central Bank dropped by 221 million euros ($263 million) from a day earlier, suggesting that there is no systemic stress. The European Money Markets Institute, which publishes Eonia, has said that the fixing data is correct.

“It would appear that there is a bank on the street that is in need of funds,” Rabobank strategists led by Richard McGuire wrote in a note to clients. “However, there could be all sorts of other less sinister factors that could be responsible.”

Thursday’s fix rose six basis points to -0.241 percent, the highest since March 2016. The rate has jumped 12 basis points in the past two days. Eonia volumes fell to 4.2 billion euros on Thursday from 7.2 billion euros a day earlier.

Meanwhile, the Euribor three-month fixing for Friday was little changed at -0.326 percent, and has virtually not moved this year.

Quicktake: What Is Eonia and Why Is It Worrying Traders?

Eonia is a weighted average of overnight unsecured lending transactions in the euro area interbank market, while Euribor represents the interbank offered rate among the region’s prime banks for longer-dated loans. The focus will now be on Friday’s fix, due at 5:45 p.m. London time, as any month-end effect will have washed out.

“The Eonia fixing is out of control,” Commerzbank strategists Marco Stoeckle and Michael Leister wrote in a note to clients. “The spike underscores the shortfalls of the current methodology, in particular the tiny volume of underlying transactions, concentration and small number of reporting banks, a point we have stressed before.”

Rabobank

  • “It’s probably fair to say that the majority of the market expected the fixing for 30th November to fall back to around the -35bp level today. However, the reality is that it actually printed at -24.1bp, which has come as a shock,” writes McGuire
    • “It’s also worth remembering that Eonia volumes are significantly lower now than has historically been the case, so there may always have been some very off-market submissions, but in the past they were averaged out and simply weren’t noticed”

Commerzbank

  • “Volumes are low but not more than usual and the EUREONIA fixing was also little changed,” write Stoeckle and Leister
    • “There is some speculation about stronger demand for euros via FX forwards, but we don’t find this very convincing”
  • More likely, it is a month-end distortion at a bank, they say
  • Notes that EMMI has four days to trigger fall-back arrangements, applying an averaging mechanism

ING

  • “For a month-end spike this was one day early and no calculation error was reported,” strategists including Martin van Vliet write
    • “Month-end spikes of this magnitude were last observed before QE”
  • This is “more comparable” to a year-end fixing

Societe Generale

  • “A massive spike in fixings underlies the fragility of Eonia in the current context of high excess liquidity and low volumes in the O/N unsecured lending segment,” write strategists led by Adam Kurpiel
    • “This increases pressure on the ECB to develop a new reference”
  • “The most plausible interpretation, in our opinion, is borrowing from one or several non-European banks, possibly EM”

©2017 Bloomberg L.P.

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