Even though some analysts expect bank demand for the European Central Bank's weekly loans to fall slightly at Tuesday's tender after they frontloaded on liquidity at the beginning of the current reserve maintenance period last week, this is seen resulting in a small decline in excess liquidity.
This in turn would be enough to keep the overnight rate around 1 percent and ease volatility in the interbank market seen in April when it spiked above the ECB's main refinacing rate of 1.25 percent. It fixed at 1.1 percent on Friday from 1.061 percent previously. Excess liquidity is currently just under 50 billion euros, according to Reuters calculations, having hit 60 billion euros at the end of the ECB's last reserves period, the highest since early February.
"Demand could come off the high levels we've seen due to the high level of front loading at the beginning of the current reserve period but it shouldn't change the liquidity picture," Commerzbank strategist Benjamin Schroder said. Banks took 125 billion euros in the ECB's weekly refinancing operation last week and almost 81 billion in one-month funding, roughly in line with trader expectations and expiring amounts.
Barclays strategists expect surplus cash to be around 30 billion euros after Tuesday's seven-day liquidity tender. "A surplus of about 30 billion at the time of the maintenance period would be consistent with EONIA printing at about 1 percent for the coming week.
"We expect EONIA to average about 90 basis points during the maintenance period, trading at 0.60-1.05 percent," they said in a note. Demand at the ECB's latest liquidity tenders was partially driven by EONIA fixing above the ECB's refinancing rate of 1.25 percent for almost half of the reserve maintenance period in April, analysts said.
While three-month London interbank offered rates for euros edged up to 1.37750 percent on Monday, their gap over central bank interest rate expectations - which is used as a measure of counterparty risk - tightened by two bps to 20 bps. That spread has remain relatively constant despite the turmoil in government debt markets, where Greek bonds are changing hands at huge discounts on concern about a potential cut in their face value.