Euro money market rates ahead of the ECB meeting

Money markets will be focused not only on the ECB’s decision in March on the depo rate but also on any suggestion of further actions later in the year, given the current expectation of a cumulative 30bp cuts by year-end. The latest inflation figure that came in weaker than expected at -0.2% reinforced these expectations. For March, the market continues to fully price in 10bp depo rate cut, with 80% chance of a 15bp reduction.

Short rates: As we believe the ECB will try to avoid the kind of disappointment as seen in December, we see risks as skewed towards a further rally of the 1y1y Eonia fwd and gradual flattening of the long part of the Eonia curve. Despite the recent tightening, we still see a widening bias on Fra/Eonia spreads.

Eonia: The fixing crept down in February hitting the historically low level of -24.9bp (depo rate +5.1bp), before the usual temporary increase at the month end (to -22.7bp). The move has been accompanied by a gradual increase in Eonia volume (from €10bn at the beginning of February to the current €17bn). This supports our view that, in the context of abundant liquidity, the changes in Eonia volumes are the main driver of the fixing, with the depo rate setting the floor.

Euribor: Fixing continued to move down across tenors, with the 3m Euribor currently at -20.7bp, about 4bp higher than our fair value of -25bp in the context of a -40bp depo rate (which is likely if the ECB cut the depo by 10bp in March as we expect).

Repo market: Apart from the usual tensions at month-end, with a moderate richening of German GC rates and moderate cheapening of the peripheral GC rate,
there were no major changes in the repo market last week. German collateral continues to trade a few basis points richer than the depo rate, while the Italian
collateral a few basis points higher.

Source: Barclays Research