MONEY MARKETS-Bearish short-term US rates move could take time

by on September 26, 2012 8:18 pm GMT

Wed Sep 26, 2012 4:18pm EDT

By Luciana Lopez

(Reuters) – A bearish move in U.S.
short-term interest rates could take longer than expected if a
rally in stocks and other risky assets peters out on worries
about the global economy due to the festering debt problems in
the euro zone.

Greece’s shaky finances moved back into the spotlight on
Wednesday as international lenders admitted to difficulty in
working out how to solve the country’s
three-years-old-and-counting debt crisis while rioters and
police clashed in the streets of Athens.

Violent protests in Spain also piled pressure on Spanish
Prime Minister Mariano Rajoy to ask for a bailout, with
investors unsure how quickly he could bring such a request to
European partners.

While RBS analysts wrote that they still have “a bearish
outlook for rates over the medium term (3-6 months)” on poor
technical conditions in U.S. Treasuries, they noted that a
recent risk rally appears to be losing momentum.

The S&P 500 index, for example, has slid for the past
five sessions.

“Of immediate concern is that medium term (weekly) charts of
key risk markets are not only looking tired, but many are
hinting at the beginning of new bear moves,” wrote William
O’Donnell, John Briggs and Gabriel Mann of RBS.

If the risk rally since early June is indeed taking a
breather, the “wait for signs that the oversold correction in
Treasuries has run its course could be a long(er) one than
imagined earlier,” they wrote.

In unsecured lending, the London interbank offered rate, or
Libor, on three-month dollars slid to 0.36225
percent, its lowest in a year, from 0.36350 percent on Tuesday.

The rate has sunk almost steadily for about three months,
and is well off the 0.58100 percent at the end of last year.


Euro zone banks have cut their borrowing from the European
Central Bank as confidence slowly creeps back into the embattled
financial sector and reduces the desire to hold large liquidity

Bank borrowing fell by 7.6 billion euros at the ECB’s offer
of three-month cash on Wednesday, contributing to a 40 billion
decline in excess liquidity in September, according to Reuters

Banks still have loans outstanding from the ECB of a huge
739 billion euros above their estimated needs but that amount is
edging lower as the latest plans to defuse the euro zone debt
crisis improve the outlook for financial institutions.