ECB bench = 0.5%. EURIBOR 2013s ~ 0.25% - help me understand?

[spearchew]

Hi,

Starting taking an interest in money markets and how they relate to the economy, but still just scratching the surface. Wonder if someone could help me understand how the money market interest rates relate to central bank benchmarks - the rate at which banks can borrow from their respective Central banks.

I cannot fathom how money market rates can be lower than Central Bank rates. Which they appear to be, at least in the case of Euribors.

I downloaded the latest settlements going out 10 years where possible, for EURODOLLAR, EURIBOR and SHORT STERLING 3M Futures.

Eurodollar 3m prices currently around 99.7 through 2013... so implies around 0.3% interest rate on unsecured 3m deposits of USD traded between reputable banks outside of the US... right?

Euribor 3m prices currently around 99.7 through 2013... so implies around 0.3% interest rate on unsecured 3m deposits of EUR traded between reputable banks around the EU... right?

Is it not the case that the ECB is the most reputable lender of all, and theirfore should have the lowest interest rates? What am I missing - feel like a dope!

thanks.

 

[Martinghoul]

Hi,

Starting taking an interest in money markets and how they relate to the economy, but still just scratching the surface. Wonder if someone could help me understand how the money market interest rates relate to central bank benchmarks - the rate at which banks can borrow from their respective Central banks.

I cannot fathom how money market rates can be lower than Central Bank rates. Which they appear to be, at least in the case of Euribors.

I downloaded the latest settlements going out 10 years where possible, for EURODOLLAR, EURIBOR and SHORT STERLING 3M Futures.

Eurodollar 3m prices currently around 99.7 through 2013... so implies around 0.3% interest rate on unsecured 3m deposits of USD traded between reputable banks outside of the US... right?

Euribor 3m prices currently around 99.7 through 2013... so implies around 0.3% interest rate on unsecured 3m deposits of EUR traded between reputable banks around the EU... right?

Is it not the case that the ECB is the most reputable lender of all, and theirfore should have the lowest interest rates? What am I missing - feel like a dope!

thanks.

It would indeed appear strange to someone who's not familiar with how money markets in different currencies work. What you're missing is the following basic fact: the various effective rates, such as Euribor, LIBOR, etc are not derived directly from the headline central bank rate. They're related, but the relationships are complicated and rarely direct.

So, in the specific case of the ECB, here's the story. The ECB benchmark rate is more or less irrelevant, at least for the moment. The ECB rate that actually matters is the deposit rate which is currently at 0. The reasons for this are technical, so let's skip the nitty-gritty for the moment. At any rate, it's the deposit rate and another mkt rate called EONIA, rather than the main ECB refi rate, that influence the level of EURIBOR, at least in the current regime.

 

[spearchew]

Thanks MG, given me some good leads to dive in to there.