Trading, Financial industry & Markets - Your money

Ecb cash injection to keep money markets calm in coming week


* Banks take 115.6 bln euros at weekly cash tender* ECB again fails to drain planned amount from market* Excess liquidity to remain ample, keeping rates low* Low Eonia reduces near-term pressure on ECB to easeBy Marius ZahariaLONDON, Jan 28 Euro zone banks borrowed enough cash from the European Central Bank on Tuesday to keep overnight money market rates subdued and quell speculation of imminent monetary policy easing. Investors have paid increased attention to the ECB's cash injections this year as some small take-ups have pushed overnight bank-to-bank borrowing rates above the central bank's benchmark 0.25 percent refinancing rate. Markets have treated such spikes as potential warnings of more ECB monetary policy easing to come in the near future. At the January ECB meeting, President Mario Draghi said the bank would loosen its policy if the medium-term inflation outlook worsened or if there was an unwarranted rise in money market rates, which should usually stay below the refi rate.

Experts and top traders in the ECB's money market contact group have also expressed concerns money market rates were rising too quickly. Traders blamed recent jumps in overnight rates on shrinking banking system liquidity as banks rely less on the ECB for funding now that the euro zone crisis has eased. At the ECB's regular offering of unlimited one-week loans on Tuesday, banks took 115.6 billion euros, roughly the same amount they took a week ago. Separately, the ECB drained only 151.2 billion euros versus the planned 177.5 billion at its weekly seven-day deposit take-up, which is aimed at neutralising, or sterilising in the jargon, the effect of sovereign bond purchases made at the height of the crisis. It was a similar result as a week before.

Together, these two ECB operations should leave enough liquidity in the banking system to keep Eonia, the overnight borrowing rate, steady around current levels of 0.19 percent in the coming week. Eonia rates reached 0.36 percent earlier this year after a small take-up at one of the weekly cash injections and after the ECB hoovered up a sum equivalent to its bond purchases."(Lower Eonia rates) naturally reduces the potential to get anything (easing steps) from the ECB next month," said Simon Smith, chief economist at FXPro. He said Eonia rates could fall to 0.12-0.15 percent if banks took more money at a three-month liquidity injection on Wednesday than they did last time. At the end of October, banks took less than 2 billion euros in three-month loans. A Reuters poll shows they are expected to take 3 billion on Wednesday.

VOLATILITY The problem with Eonia rates being so heavily influenced by how much banks borrow from the ECB at weekly tenders is that they can be more volatile."(The market) seems to be trapped in this reaction every week to the weekly operations, how much is added or drained and the sterilisation operation," one money market trader said. Such a situation may create discomfort within the ECB, said Smith at FXPro and other analysts. Peter Schaffrik, head of European rates strategy at RBC Capital Markets, said he expected the ECB to keep policy unchanged in February. But he "could well imagine" Draghi telling the market rate cuts were discussed at the meeting. That would be an attempt to counter the rising pressure on money market rates."Volatility is never good ... it creates uncertainty," Schaffrik said.

Money funds rates ultra low but no place to go


* Money fund assets level off as retail investors sit tight* Advisers see few safe alternatives for cashBy Ross KerberJune 5 The miniscule interest rates being paid by money market mutual funds are making many investors restless, but wealth advisers are urging most to stay the course. Already historically low U.S. short-term interest rates have dipped even lower in recent weeks as investors fleeing financial turmoil in Europe have sought safe havens. But investors have little to fear that rates could turn negative on money market funds, and alternatives like bank savings or checking accounts are no more appealing, advisers said."Everything that is stable is crummy," said Douglas Conoway, managing principal of Wealth Management Group LLC in Rochester, New York. "There's no place to go."Conoway's firm invests about 5 percent of its $40 million in client assets in money funds, the same level as a year ago.

The stability of money funds does not mean investors are happy with their rates. John T. Boland, president of Maple Capital Management Inc in Montpelier, Vermont, said clients often call to complain about low rates, which he said "have given a whole new meaning to the phrase 'cash drag.'"But there are not a lot of alternative investments he can suggest -- "which is why we are holding the cash in the first place!!" Boland wrote in an email. Low interest rates have already forced fund sponsors to waive billions of dollars in fees to prevent yields from going negative. Fund companies have the resources to keep waiving fees and maintain yields above zero, said Peter Crane, publisher of Cranedata.com, a website that tracks the industry."If they haven't gone negative by now, guess what, they're not going negative," he said.

By some measures, the pressures on fund companies are easing despite the safe-haven flood into short-term U.S. government securities. While rates on Treasury bills declined, rates on other investments the funds buy such as repurchase agreements have ticked up. Big fund sponsors like Fidelity, Federated Investors Inc and JPMorgan Chase & Co on average waive 45 percent of fund fees, down from 50 percent several months ago, Crane said. The desire for safety should be paramount, said Philip Blancato, chief executive and president of Ladenburg Thalmann Asset Management in New York. "While there is little yield available in the market today, we continue to believe safety of assets is more important than yield," he said.

A few advisers have tried to come up with alternatives to money funds. In Westport, Connecticut, Gerard Gruber, chief investment officer of Hayden Wealth Management, said his firm might suggest a combination of municipal bonds, fixed annuities or dividend-paying stocks and funds. Only the safest money funds pass its screens, such as those that invest in government-backed instruments."Our clients are willing to accept a lower money market rate that invests conservatively than be with one that takes more risk and has exposure to possible losses," he said. In Michigan, financial planner Theodore Feight said he has started replacing money fund holdings with dividend-paying stocks like those of Intel Corp and Altria Group . He also has bought high-yield corporate bond exchange-traded funds."Money market rates are just not cutting it anymore," he said. Hoping to capture flows, some firms have pitched new products as money fund alternatives. On a web page about a new fund, for instance, Pacific Investment Management Co, operator of the world's biggest bond fund, writes: "PIMCO Short Asset Investment Fund offers higher income potential than traditional cash investments. ... Unlike money markets, however, the net asset value (NAV) of the fund may fluctuate."Many of the new funds fall into the category of "ultra short obligation bond funds" tracked by Thomson Reuters' Lipper unit. Flows to these funds totaled $2.2 billion through the end of May, on pace to surpass the $3.4 billion they took in for all of 2011. Still, that is just a drop in the bucket compared with money fund assets overall. The funds held $2.55 trillion at May 29, down from $2.65 trillion at the start of the year, according to iMoney.net.