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Money markets us rate futures fall after jpmorgan loss


* JPMorgan trading loss raises counterparty concerns * Risk seen rising on a steep Moody's cut of JPMorgan * No signs of immediate dollar-funding stress for banks By Richard Leong NEW YORK, May 11 Front-month U.S. short-term interest-rate futures fell and risk premiums on interest-rate swaps grew on Friday after JPMorgan Chase & Co warned investors of a $2 billion loss on soured credit derivatives bets. On the other hand, there was no sign of immediate strain in the dollar-funding market in the wake of this stunning news late Thursday from JPMorgan, which is perceived to be the safest among large U.S. banks, analysts said. Still, this trading loss at JPMorgan raised concerns about other banks' own derivatives strategies and their exposure to JPMorgan's book of derivatives, analysts and traders said. Most Eurodollar futures for delivery through September 2004 ended 0.5 to 3.5 basis points lower for the day, while deferred contracts ended 1 basis point to 4 basis points higher. The risk premium on short-dated dollar interest-rate swaps over Treasuries rose to the highest level since late February, suggesting investors reduced their holdings of these over-the-counter contracts, which are often underwritten by banks. "People have been selling outright, based on swap-spread wideners," said Jim Lee, head of short-term markets and futures strategy at RBS Securities in Stamford, Connecticut. The yield spread on two-year interest-rate swaps over comparable Treasuries was last quoted at 34.50 basis points mid-market, 2.25 basis points wider than late on Thursday, according to Tradeweb. JPMorgan's derivatives loss occurred as investors are fretting once again about contagion on the global banking system from the debt crisis plaguing the euro zone, they said. Some analysts said the loss increased the chances that Moody's Investors Service could impose a steep downgrade of the credit ratings of JPMorgan, the biggest U.S. bank by assets. There are few details at this time on how JPMorgan's bets soured. "It validates Moody's review on these global financial institutions," said Lance Pan, director of research and strategy at Capital Advisors Group in Newton, Massachusetts. He added that part of "the rationale is that their books are 'black boxes.'" Moody's has said it will announce its rating decisions on European banks, and 17 global institutions, including JPMorgan, sometime from early May through late June. The rating agency said in February it could lower JPMorgan's long-term credit rating by up to two notches after its broad bank review. Moody's currently has a Aa3 long-term rating on JPMorgan. But JPMorgan's top-notch P-1 short-term rating from Moody's is not subject to this review. In the credit default swap market, the five-year cost to insure against JPMorgan's debt rose to 128 basis points, up from 124 basis points on Thursday and 110 basis points on Wednesday, according to data firm Markit. "It's a black eye for (JPMorgan chief) Jamie Dimon, but investors might end up punishing other banks," Capital Advisors' Pan said. The five-year CDS prices on other U.S. banks rose with JPMorgan's. For example, Bank of America's five-year CDS prices rose to 282 basis points, the highest in about a month, while Morgan Stanley's five-year CDS prices climbed to 399 basis points, the highest since Jan. 2, Markit data showed. NO IMMEDIATE FUNDING STRESS So far, news of JPMorgan's loss did not result in a spike in short-term borrowing costs for banks and Wall Street firms. Interest rates in the $1.6 trillion tri-party U.S. repurchase markets, a key source of cash for banks and Wall Street firms to finance their trades, held steady on Friday. They mostly traded in a range of 15 basis points to 17 basis points, matching Thursday's range, investors and traders said. As investors grapple with the longer-term implications of this loss on JPMorgan and the banking system, investors said JPMorgan has plenty of capital and a huge deposit base. It is not reliant on issuing commercial paper and other short-term debt to raise cash, they said. "It's not a funding issue for them. It is still a sound company," said Bret Barker, portfolio manager at TCW Group in Los Angeles, which manages $128 billion in assets. Earlier in London, Libor on three-month dollars held again at 0.46685 percent, hovering near its lowest level since mid-November. Libor is a rate benchmark for $360 trillion worth of financial products worldwide.

Money markets us repo rates take back some of weeks dip


U.S. repurchase agreements rose on Friday, recovering a portion of the week's losses that have come amid speculation the Federal Reserve could eventually cut the interest rate it pays on excess reserves to banks. Investors are mulling whether the Fed could follow the lead of the European Central Bank, which this month cut to zero the deposit rate it pays banks for parking money with it overnight. Fed Chairman Ben Bernanke, in speaking to Congress this week, listed a cut in the interest paid on excess reserves (IOER) as one of the tools available to the central bank in its efforts to prop up the economy. Some investors believe the Fed may actually take the step, and the rate on repos secured by Treasuries has dipped this week as a result. Repo rates were last quoted on Friday at 21 basis points, up from 17 basis points on Thursday but down from 29 basis points on Monday."Although cutting IOER received only a peripheral mention by Bernanke and has not been listed as a policy option in the Federal Open Market Committee minutes since last year, the market has begun pricing in a cut," said Joseph Abate, market strategist at Barclays Capital in New York.

Abate adds however that he considers it "unlikely" the Fed will cut IOER, which currently stands at 0.25 percent. Separately, euro zone money markets have been wary of pricing in any prospect the ECB might cut its deposit rate below zero, but there are signs that such an unprecedented move is no longer considered unthinkable. The forward euro zone EONIA overnight interest rate for December traded at 6 basis points on Friday, less than the average spread of 8 basis points over the ECB's depo rate seen in the past few months. The rate projected for December is just half of Thursday's 0.12 percent EONIA settlement and indicates that the market is pricing in a tiny possibility that the ECB deposit rate may go below zero later this year.

"It does not seem to have been any serious flows in the market yet, but some in the market are starting to talk about this," said Max Leung, an interest rate strategist at BofA Merrill Lynch Global Research in London. Recent comments from ECB policymakers suggested that the central bank is keeping the door open for further easing, but the form any such step would take is unclear. If the ECB ever does cut its refinancing rate from the current record low of 0.75 percent, the question arises whether it will keep the gap over the depo rate at the usual 75 basis points.

If the deposit rate turned negative, the ECB would have to change the way it manages banks' excess reserves in the current account as well if it wants to penalize banks for parking cash in the ECB's safe coffers rather than lending to each other or to businesses. The only certainty in the market about the ECB's next move is that it will not cut the depo rate again in the near future, because it will take several months to assess the full impact of the July 5 cut to zero. Many are already expressing serious doubts that the zero rate will spur activity in the interbank market and filter through to the real economy. In fact, some of the biggest money managers have already restricted access to European money market funds due to the almost non-existent returns. Besides, most banks are not lending because they do not trust each other and that may not change even if they are penalized for it."In an environment where it is return of capital that counts, rather than return on capital, you may well have to pay someone to be the guardian of your money," said Simon Peck, rate strategist at RBS in London."Just because the deposit rate is zero or going lower doesn't necessarily imply that straight away you can change your risk management framework."