Eonia's Spike Is Bizarre, But Let's Not Call It a Crisis

(Bloomberg Gadfly) -- In the world of infinite money a spike in overnight money rates is bizarre. A sudden demand for cash is reminiscent of the dark days of the financial crisis, when Libor rates were all over the place. 

Eonia has swung around from minus 0.36 basis point, the level it's traded at pretty much all year, to minus 0.30 basis point on Wednesday and jumped again at Thursday's fix to minus 0.24 basis point. So this is real, not a "fat finger" error. 

Eonia is not a posted rate where banks would like to do business, such as Libor, but a weighted average index of actual trading in unsecured overnight money. It's a real number, not an aspiration or an advertisement. It hugs the European Central Bank's deposit rate, which is the fixed rate the ECB charges for commercial banks to place money with the central bank. The fact that it measures reality might suggest that the recent jump signals a deep problem in one corner of Europe's financial plumbing.

Yet Eonia money brokers are still quoting around minus 0.36 basis point. This suggests there's no contagion in the about 10 percent of the market that is brokered. There haven't been similar jumps in longer-dated (beyond one day) money markets. So far, no contagion.

The spike has to reflect bank-to-bank business; we can rule out transactions with the ECB because these are not included in the daily fix.

This naturally raises the question of who are the culprits. Certainly no institution is putting its hand up to claim responsibility. But more to the point, there is no evidence of any major lender suddenly dropping out of the market.

Equally, there is nothing in the ECB liquidity data, or level of usage, which suggests a liquidity squeeze is brewing. 

The most likely explanation is a technical hitch, rather than some sudden crisis warning. The cause of the spike could be a U.S. financial institution that has switched its year-end accounting period from Dec. 31 to Nov. 30. This may have driven a sudden need for short-term liquidity, thereby causing a squeeze.

It was month-end for many financial institutions on Thursday, on top of which we are approaching year-end periods, when cash and collateral rates often get squeezed. A bit of indigestion shouldn't be a surprise. But a move this big is. 

The ECB offers weekly "all you can eat" liquidity operations for banks to access as much cash as they need. The next main refinancing operation is on Wednesday. This glitch should have passed through the system by then. Bar this one-off, all the signs were that 2017 year-end funding was set to be much smoother than last year's.

There's a way to get a grip on what's happening. Watch today's fix, which will come around 1:00 p.m. New York time, to see if the high prints disappear as we enter a new trading month.

If so, then it's a return to normal. Volume figures suggest that's where we're headed -- Eonia trading dropped significantly on Thursday to 4.2 billion euros ($5.7 billion euros) from 7.2 billion euros. If not, then there is something else at work, and maybe we do need to start worrying about banks' liquidity positions.

There's an old saying in financial markets: There's never only just one cockroach. But with this much money washing around, it's hard to see why there needs to be any insects in the first place.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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