Euro zone money market spike driven by French banks' contingency tests -traders

A sudden jump in the European Central Bank's new ESTR overnight interest rate this week was triggered by French banks bidding for extra cash as part of contingency tests, two sources familiar with the bloc's money markets said on Friday. The euro short-term rate, ESTR, spiked around 3 basis points to -0.511% at Wednesday's fixing from the previous day. It had fallen back to -0.542% at Thursday's fixing.

The spike raised eyebrows in eurozone bond and money markets, where investors are assessing how the ECB's overnight rate responds to the central bank's new tiered interest rate structure. Two sources told Reuters that the jump in the ESTR rate was sparked by unexpected pressure from one or more French banks doing some contingency testing. That would involve the lenders bidding for additional cash in the overnight market.

"The French testing their limits in the system is the more correct reason for the jump in ESTR," said one money market source, who asked not to be named. "I guess it makes sense to make sure there is enough debt in case you need liquidity."

Another trading source said that while contingency testing is not unusual, the jump in ESTR may have come about because market liquidity has been thinned by banks parking excess cash at the ECB to take advantage of the new tiered rate policy. The tiering system allows eligible banks a 0% interest rate on part of the reserves they hold at the ECB, rather than the deposit charge that equates to the bank's base rate of -0.5%.

"Because of tiering, when banks do this testing it's harder to find the liquidity," the trader said. "But I don't think there will be a lasting impact."