Jump in overnight euro bank lending rate baffles markets

LONDON (Reuters) - A key overnight benchmark rate European banks use to lend money to each other showed signs of stabilizing on Friday after a surge this week that raised questions about possible funding stresses.

The Euro Over Night Index Average  had spiked 12 basis points over two fixings, leaving analysts puzzled by the sudden surge.

But on Friday it was fixed at -0.291 percent, down from -0.241 percent on Thursday, its highest since March 2016.

Still, EONIA was set for its biggest weekly rise since November 2014, according to Reuters data.

That’s a marked contrast for a rate that has been in a tight trading range for more than a year.

Traders said they suspected the sharp rise in the rate was sparked by demand for funds by one bank but did not have any further details, while others added that month-end demand for funds may also have made a contribution to the rise.

“I haven’t heard anything systemic here and it seems to be related to one firm which is having some funding issues and we will come to know next week,” said Kit Juckes, head of FX strategy at Societe Generale.

“There is no spillover effect to other markets for now.”

A spokeswoman for the European Central Bank confirmed that the readings of the fixing were accurate. They are published after the close of markets on each trading day.

Another possible cause for the EONIA spike could be a bank or banks which recently enjoyed ratings upgrades, switching their source of funding from the ECB to the interbank market, other analysts said.

But while the rare spike in EONIA rates has caused a stir in financial markets, most analysts did not believe it was a sign of broader funding stress among European banks.

Most also reckon the benchmark remains a valid measure of interbank lending rates.

“We have a robust economic backdrop, countries such as Italy have been addressing problems in its banks and the sector is more solid than it has been for some time, so I don’t see liquidity problems,” said DZ Bank rate strategist René Albrecht.

Still, given this week’s sharp moves, traders and analysts had been watching Friday’s fixing with interest. “EONIA is only built on real deals, the only weakness is that it is 28 contributors,” said one euro zone money market trader.