Money markets one year eonia rates head towards negative territory

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* Eonia rate closes in on zero on deposit rate cut bets* Off day's lows as ECB policymakers downplay Draghi comments* One-year Eonia rate seen testing record lowsBy Ana Nicolaci da CostaLONDON, May 3 The average cost of overnight borrowing in euros for a year fell close to zero on Friday and could dip into negative territory after the European Central Bank hinted it was open to deposit rate cuts. Eonia rates fell to their lowest since December 2012 a day after ECB President Mario Draghi said the central bank was "technically ready" and open-minded with regards to a cut in the deposit rate and stood ready to act if needed. They came off those lows as ECB officials downplayed the market reaction to Draghi's comments, but analysts said one-year Eonia rates would likely test record lows hit in December 2012.

ECB Governing Council member Erkki Liikanen said there was nothing different in Thursday's discussion about deposit rates. Fellow policymaker Ewald Nowotny said the possibility of a deposit rate cut was not relevant for now, although he later sought to soften those comments."As long as the market continues to price the possibility of negative deposit rates, as they started to do after yesterday's comments ... I expect Eonia rates in medium-to-long term maturities to remain low," said a fixed-income strategist at a London-based bank who asked not to be named."Last December the market was pricing in negative depo rates. So I would say that markets could move to the same level."

One-year fixed-term Eonia rates, which reflect the expected average cost of overnight borrowing over the life of the contract, fell as far as 0.001 percent - its lowest since mid-December. It came off those lows to 0.04 percent, but analysts said it could well test record lows of -0.037 percent hit on Dec. 7 in the near-term. The Eonia curve was inverted, with one-year rates lower than the Eonia overnight borrowing rate, which last stood at 0.078 percent.

Alessandro Giansanti, senior rate strategist at ING, also said one-year Eonia rates could fall as far as -0.05 percent after the ECB's comments the previous session. He said the ECB was trying to prevent money market rates from rising, as the repayment of ECB crisis loans squeezed excess liquidity in the financial system. Excess liquidity last stood at 313.3 billion euros, not far from 200 billion, the level at which market rates have historically tended to start rising."I am not sure that they will decide to decrease the deposit facility to negative levels, but if the situation will not improve on the macro side, I think they will do more easing," Giansanti said. "We are going towards a period of very subdued Eonia rates."Two-year fixed-term Eonia rates also fell to their lowest since December last year at 0.026 percent earlier but were last at 0.063 percent.