Barclays UPDATE Euro Money Markets Weekly Reading The 3m Euribor Decomposition

Interest Rates Research
Europe
19 May 2015
Euro Money Markets Weekly
Reading the 3m Euribor decomposition

UPDATE: This report replaces the version published earlier today to correct the fourth
bullet point regarding this weeks MRO on page 6.
Contents
Focus: Reading the 3m Euribor
decomposition
3m Euribor: Our analysis of the decomposition of the 3m Euribor suggests that the
Eurosystem liquidity conditions
recent steepening of the money markets curve is likely to have been caused by a
sharp rise in expectations of an ECB policy rates hike by mid-2017.
Short rates: We regard the latest price actions on money markets rates as too
aggressive. While some steepening is likely to remain in the blues/gold part of the
strip, we expect reds versus whites to flatten. We also recommend receiving 1y1y
Eonia forward, which, after the latest sell-off, is now at the same level as the end of
December last year, before the QE announcement.
Eonia
10
Euribor
11
Short rates snapshot
12
T-bill market
15
Repo market
16
Appendix: Haircuts at the ECB
17
Liquidity conditions: The liquidity surplus has stabilized at about 300bn. We see room
for a mild decline this week owing to the expected increase in autonomous factors The
QE purchases should limit the downward movement in the excess of liquidity.
Eonia: The drop in the fixing last week to about -14bp was mainly due to the public
holiday in some eurozone countries that reduces the amount of reported
transactions. The fixing rose to -11bp after the public holiday. Our analysis shows
that at the current level of the surplus, the fixing should be at about -9bp/-10bp.
T-bills: T-bills have remained immune from the recent increase in volatility.
Peripheral t-bills have moved in marginally negative territory, while almost of the
core paper is below the depo rate.
Repo market: Demand for peripheral collateral at the very front end has favoured
some tightening of the spreads vs core. The interest is less strong at longer
maturities, where overall liquidity is poor.
FIGURE 1
Short rates Current levels and our expectations
Rates
Actual
1wk change
(bp)
1m change
(bp)
Barclays 3m
expectations
Eonia fixing
-10.5
-2
-3
Overnight GC pooling
-17.9
-1
-7
GC pooling vs Eonia
3m Euribor
-1.1
-1
3m OIS
-11.7
-1
11
-7
-32.3
-2
-7
-21
-1
3m FRA/OIS
3m Bubil
3m Bubil vs OIS
Note: Negative change means richening; positive change means cheapening. Source: Bloomberg, Barclays Research
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 17
Giuseppe Maraffino
+44 (0)20 3134 9938
giuseppe.maraffino@barclays.com
Barclays, UK
Huw Worthington
+44 (0)20 7773 1307
huw.worthington@barclays.com
Barclays, UK
www.barclays.com
Barclays | Euro Money Markets Weekly
FOCUS
Reading the 3m Euribor decomposition

Giuseppe Maraffino
+44 (0)20 3134 9938
giuseppe.maraffino@barclays.com
Barclays, UK
Huw Worthington
+44 (0)20 7773 1307
huw.worthington@barclays.com
Barclays, UK
Volatility of bunds has

remained the main theme. In
the Euro money markets
curves have remained steep
This is an edited version of the Euro Strategy piece published in Global Rates Weekly, 15 May 2015.
Our analysis on the decomposition of the 3m Euribor suggests that the recent steepening of
the money markets curve is likely to be caused by a sharp rise in expectations of an ECB
policy rate hike by mid-2017. We regard such price actions as too aggressive. While some
steepening is likely to remain in the blues/gold part of the strip, we expect reds versus
whites to flatten.
Volatility in the EGB market, and in particular Bunds, was still the main theme last week. The
10y Bund yield has risen about 15bp since the beginning of last week to about 70bp, with
frequent intraday moves in excess of 10bp per day. In the 8 May Global Rates Weeklys
strategy section, we discussed the technical and fundamental factors that could be behind
the sell-off and concluded that volatility is likely to continue for a while with some
stabilisation in the near term.
Notably, in the euro money markets, both the OIS curve and the future strips have remained
steep, as shown in Figures 2 and 3. 3y OIS rate has approached zero from -15bp as of mid-April
(the 1y1y Eonia forward has moved further up to about -6bp). The very front-end rates are
broadly unchanged as they depend on the current liquidity conditions, which have slightly
improved with the surplus that has moved just above 300bn. Interestingly, on the Euribor
futures curve, the upward movement has also involved white contracts, with September and
December 2015 futures currently pricing in the 3m fixing at zero and 1bp, respectively. Such
pricing action is not consistent with expectations of a massive increase in excess liquidity in the
coming months, as a consequence of the QE purchases, that would push the Eonia fixing
towards the depo rate. This would create the room for a further decline of 3m Euribor into
negative territory from the current level of -0.9bp. Such a move could also be favoured by a
possible reduction in the credit premium. We see 3m Euribor at -5bp by the end of the year (with
risk skewed to the downside), lower than the current pricing of the ERZ5 of +1.0bp. A possible
explanation for the recent cheapening in these two contracts might be related to the fact that the
market has started to price in some likelihood of worsening of the situation in Greece, although
this would not appear to be consistent with the sell-off in Bunds and the tightening of German
paper in ASW, especially at the short tenors.
FIGURE 2
The steepening has continued on both the OIS curve
FIGURE 3
and on the Euribor future strip
50
2.5
14-May-15
0.0
7-May-15
16-Apr-15
45
14-May-15
40
07-May-15
-2.5
35
-5.0
30
-7.5
25
20
-10.0
16-Apr-15
3m Euribor - Barclays
Forecasts
15
-12.5
10
-15.0
5
0
-17.5
-5
1w
2w
3w
1m
2m
3m
4m
5m
6m
7m
8m
9m
10m
11m
12m
15m
18m
21m
24m
36m
-20.0
Source: Barclays Research
19 May 2015
-1-3
-10
May-15
-5
-7
Feb-16
Oct-16
Jul-17
Apr-18

3m Euribor decomposition
shows that the term premium
has doubled over the past
month
Figure 4 shows the decomposition of the current pricing of the 3m Euribor up to 2018 and
provides interesting insights about the evolution of the term premium over the last month.
The 3m Euribor basically comprises two components: 1) the 3m OIS, which mainly captures
the monetary policy expectations, and 2) the credit risk component, ie, FRA/Eonia spread.
The former is also the result of the level of the policy rate (ie, refi rate) and the spread of the
3m OIS vs the cost of liquidity at the ECB operations (the refi rate), which is negative in a
context of excess liquidity and tends towards zero when the surplus declines below a
certain threshold, which we estimate at about 150bn. We have calculated the fair level for
the 3m Euribor as the sum of our expectations on all these components. We estimate the
term premium as the difference between our estimated fair level and the pricing of the 3m
Euribor contracts (Figure 4). Interestingly, as shown in Figure 5, the term premium has
more than doubled since mid-April.
FIGURE 4
3m Euribor decomposition: increasing term premium (bp)
80
60
40
20
0
-20
-40
June 2015
Refi
ois vs refi
June 2016
euribor/OIS
June 2017
Term Premium - 14 May 2015
June 2018
Euribor futures - 14 May2015
Source: Bloomberg, ECB, Barclays Research
The ECBs monetary policy: We expect it to remain accommodative

So far the ECB has remained committed to its target of 60bn of asset purchases per
month. At the last press conference in mid-April, President Draghi reiterated the ECBs
commitment to run the purchases until the end of September 2016 and, in any case, until
we see a sustained adjustment in the path of inflation that is consistent with our aim of
achieving inflation rates below, but close to, 2% over the medium term. We expect inflation
to remain low for a long period, moving on a moderate upward trend. More specifically, we
see it averaging 0.2% this year and 1.1% next year. Therefore, it is likely that the ECB will
maintain its extremely accommodative monetary policy stance for a long period, even after
the natural conclusion of the QE programme in September 2016. In our analysis, we start
from the assumption that policy rates will remain unchanged for the entire horizon and then
we discuss the possible scenarios for the next few years. A technical adjustment of policy
rates out of negative territory would be unlikely in the near term: moving only the depo rate
up to zero would imply a massive tightening of the monetary policy corridor that would
have negative implications for interbank activity in the euro money market. Keeping the
corridor unchanged would imply an increase of the refi rate as well with the risk of creating
expectations of further hiking, thereby causing a tightening of the financial conditions.
OIS vs refi spread: A function of the excess of liquidity

We expect the liquidity surplus to increase to more than 1trn next year as a consequence of
the liquidity injected via the QE purchases and, to a lesser extent, the TLTROs. Importantly,
even after the natural conclusion of the programme in September 2016, the passive
19 May 2015

withdrawal of the excess of liquidity as bonds approach their maturities is likely to take a long
time given the long average maturity (currently about eight years) of the ECB purchases. The
analysis of the relationship between Eonia and level of excess liquidity shows that the Eonia
fixing as well as the very front end of the Eonia curve start to be sensitive to change in the
liquidity conditions when the surplus is below 150/200bn. Therefore, a massive tightening of
the liquidity conditions is required after the conclusion of the programme for an increase in
Eonia towards the refi rate. As a consequence, we expect the 3m OIS to stay below the refi
rate with the spread slightly tightening in 2017 and 2018, from about -20bp expected in 2016
towards -18bp and -15bp in the following two years.
Euribor vs OIS spread

In our analysis, we have assumed a gradual moderate tightening of the Euribor/OIS from
the current level of 10bp to about 7bp next year, as the ongoing ECB purchases, as well as
the expected improvement in the economic situation should promote a further
improvement in market sentiment. Our assumption takes into consideration a positive
conclusion of the Greek crisis with a deal to be reached by the end of June. We assume the
Euribor/OIS spread widens slightly in 2017 and 2018 towards 15bp, in line with current
pricing of the FRA/OIS spread forwards.
FIGURE 5
Term premium estimates: Now and one month ago (bp)
45
40
35
30
25
20
15
10
5
0
June 2015
June 2016
Term Premium - 14 May 2015
June 2017
June 2018
Term Premium - 16 April 2015
Source: Bloomberg, ECB, Barclays Research
Term premium
Term premium: Too big for
2016 and 2017
19 May 2015
The term premium reflects the uncertainty discounted by the market regarding the
evolution of policy rates as well as the liquidity conditions that affect the OIS vs refi rate
spreads and developments in the credit risk component embedded in the money
markets rates. Our analysis suggests that the change in the size of the term premium
over the last month is mainly due to the increase in the OIS rates, which should mainly
reflect a change in monetary policy expectations as, given the expected massive
increase in the liquidity surplus, the OIS vs refi should remain broadly unchanged. We
could estimate that the increase in the term premium for 2017 is broadly consistent
with expectation of a 25bp policy rate hike by mid-2017. We regard such expectations
for policy rates as too aggressive, especially for the 2016 and probably also for 2017
tenors, given the expected moderate dynamic for inflation. For longer maturities, it is
premature to have a clear view on the possible monetary policy decision. Therefore, we
regard the current level of contracts in 2016 as too cheap compared to our
expectations for policy rates. Also, 12bp of red vs whites contracts spread looks too

wide, in our view. We expect a correction of the current monetary policy expectations
that would imply a tightening of such a spread in the near term.
but for 2018 it is probably
justified by the higher
uncertainty on monetary policy
19 May 2015
Uncertainty over policy rates is much higher in 2018 since there could be a monetary policy
tightening on policy rates while the reduction in the surplus is unlikely to be aggressive
enough to bring the excess of reserve to a level that could affect the 3m OIS, thus reducing
its spread vs. the refi rate. The size of the term premium for the 2018 tenor, while too big
over the last month, is therefore justified by the greater uncertainty around the monetary
policy in the medium term with risks on policy rates skewed to the upside given the current
low level. Therefore, the money market curve (blue vs reds spread) is likely to remain steep.
EUROSYSTEM LIQUIDITY CONDITIONS

The liquidity surplus remained broadly unchanged last week at about 297bn. Indeed, last week there was just a 4.6bn drop
in the MRO borrowing, broadly offset by the decline in autonomous factors.
According to the ECBs forecasts, autonomous factors are expected to average 106bn, net of ECBs asset purchases in the
period May 18-26. This is about 16bn higher than the current level, suggesting some increase in the next few days.
The ECB announced that, as of 15 May, the PSPP portfolio amounted to 122.4bn. This means that an additional 13.7bn of
government bonds/agencies/European institutions debt was bought in the period 7 May 13 May, ie, with settlement by Friday,
15 May. On the ABS purchases side, the ECB bought just 0.3bn in the same reporting period, with the total amount of ABS
purchases at 6.131bn. The CBPP3 purchases amounted to 2.78bn in the reference period, with the CBPP3 portfolio reaching
almost 80.76bn as of 15 May. Taking into account the CBPP1&2 portfolios, the total ECB holdings of CB amounted to 117.4bn as
of 15 May. The SMP portfolio was unchanged at about 138.1bn. Overall, the ECB injected about 16.8bn last week.
This week, only the MRO is scheduled on Tuesday 19 May (90.6bn maturing), where we expect a roll broadly in line with the
amount maturing.
All in all, owing to the expected increase in autonomous factors we expect a decline in the surplus probably to about 285bn
with the QE purchases that should limit the downward movement in the excess of liquidity.
FIGURE 6
Fortnight calendar: Main events and ECB operations
Events
Day of MP
Mon
Tue
Wed
Thu
Fri
Mon
Tue
Wed
Thu
Fri
18-May
19-May
20-May
21-May
22-May
25-May
26-May
27-May
28-May
29-May
27
28
29
30
31
34
35
36
37
38
-) ECB 1st
estimate of
Aut. Factors
May 25
June 2
-) Weekly Fin.
Statement as of
May 22
CB meetings
Facts in the reserve

period
ECB nonmonetary
policy meeting
-) ECB 1st
estimate of
Aut. Factors
May18 26
-) Weekly Fin.
Statement as of May
15
-) ECB 2nd estimate
of Aut. Factors
May18 26
-) ECB 2nd
estimate of
Aut. Factors
May 25 June 2
MRO
MRO roll (90.6bn

maturing)
MRO roll
MRO
settlement
3m LTRO
MRO
settlement
3m LTRO
allotment
(54bn
maturing)
3m LTRO
settlement
1w USD liquidity
Liquidity surplus bn
290
290
280
280
280
280
280
300
290
290
Eonia fixing
-10.5bp
-10.0bp
-10.0bp
-10bp
-10bp
-9.5bp
-9.8bp
-9.8bp
-10bp
+5bp
Note: Our liquidity surplus estimates are only indicative; they are based on the assumption of stable autonomous factors and MRO borrowing
Source: ECB, Barclays Research
19 May 2015
Liquidity conditions (I): OMO liquidity

FIGURE 7
Liquidity surplus: liquidity OMO vs liquidity needs ( bn)
1,400
Autonomous Factors
Liquidity OMO
Reserve Requirement
1,200
FIGURE 8
Breakdown deposit facility vs excess reserve ( bn)
1,000
800
1,000
Deposit facility
Excess reserves
Liquidity surplus
600
800
400
600
200
400
200
0
Aug-11
May-12
Feb-13
Nov-13
Aug-14
May-15
-200
May-10
May-11
May-12
May-13
May-14
FIGURE 9
Current outstanding of ECBs refinancing operations (bn)
FIGURE 10
Evolution of the ECBs liquidity operations ( bn)
350
1,250
May-15
MRO
LTRO 3m
300
1,000
250
LTROs longer than 3m
750
200
310
150
500
100
250
50
91
99
MRO
3m LTROs
0
TLTROs
Jan-07
Sep-08 May-10 Aug-11 Nov-12 Feb-14 May-15
Liquidity surplus
The liquidity surplus is calculated as the difference between the supply of liquidity (via the Eurosystem refinancing operations +
MLF) and the liquidity needs (autonomous factors + reserve requirement).
As the Eurosystem is a closed system, at the end of each day the excess of liquidity needs to be redeposited at the ECB (deposit
facility) or at the National central bank (in the current account, in excess of the reserve requirement).
The ECB could inject liquidity via its refinancing operations (MRO + LTROs). They are reverse repo operations and are conducted
at full allotment at least until December 2016, in exchange of ECB eligible collateral. The cost is the refi rate for the MRO and the
average of the refi rate during the life of the operations for the LTROs, with the exception of the TLTRO where the cost is fixed at
the refi rate. QE purchases are not accounted for in the calculations of the OMO liquidity outstanding. They impact the liquidity
surplus as they are subtracted from autonomous factors.
Banks could get ECB liquidity at any time via the Marginal lending facility in exchange for ECB eligible collateral at the cost of the
MLF rate (refi rate +25bp).
19 May 2015
Liquidity conditions (II): ECBs asset purchases programmes

FIGURE 11
ECBs balance sheet and its main components on the asset side (bn), as of
3,500
3,000
2,500
Mon. portfolios
Liquidity operations
Gold
Claims on non resident in
Other claims on banks in (ELA)
Gov debt in
Other assets
2,000
1,500
1,000
500
0
Jan-07
Nov-07
Sep-08
Jul-09
May-10
Mar-11
Jan-12
Nov-12
Sep-13
Jul-14
May-15
FIGURE 12
Monetary policy portfolios (bn)
CBPP1
CBPP2
CBPP3
ABSPP
SMP
PSPP
Total
As of 15-May-15
25.3
11.3
80.8
6.1
138.1
122.4
384
1W change
0.00
0.00
2.78
0.30
0.00
13.70
17
Change since the QE

start (09-March-2015)
-6.1
-2.2
80.8
6.1
-8.3
122.4
193
19 May 2015
Liquidity conditions (III): autonomous factors (as of Friday, 08 May)

FIGURE 13
Government deposits: weekly dynamic (EUR bn)
140
2015
2014
FIGURE 14
Banknotes: weekly dynamic (EUR bn)
1,100
2013
130
2015
2014
2013
1,050
120
110
1,000
100
950
90
80
900
70
60
850
50
40
1
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
800
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
FIGURE 15
Decomposition of autonomous factors (EUR bn)
ASSETS
8-May-15
1-May-15
Change
LIABILITIES
8-May-15
1-May-15
Change
Autonomous liquidity factors (A)
1056
1057
-1
Autonomous liquidity factors ( C )
1520
1517
Net foreign assets

(A.1+A.2+A.3 -L.7-L.8-L.9)
655
657
-2
Bankontes (L.1)
1027
1027
Governments deposits (L.5.1)
54
50
Other Autonomous factors (net)

(A.4+A.6+A.9 -L.2.5-L.3-L.5.2-L.6-L.10-L.11-L.12)
438
440
-2
Domestic assets
(A.7.2 + A.8)
401
Monetary Policy Instruments (B)
504
517
-13
Monetary Policy Instruments (D)
408
408
MRO (A.5.1)
95
108
-13
Reserve Requirement (L.2.1)
299
300
-1
LTRO (A.5.2)
409
409
Excess reserve (L.2.1)
MLF (A.5.5)
Absorbing operations (L.2.3+L.2.4)
Deposit facility (L.2.2)
108
108
Total
1927
1925
Total
Net liquidity effect from Aut. Fact.
(Aut. Liablilities Factors - Aut. Asset Factors)
'(C) - (A)
SMP+CBPP
Net liquidity effect from aut. Fact. and SMP
(aut liablilities factors - aut asset factors - SMP
settled by Friday)
400
1560
1574
-14
464
460
367.2
350.8
16.4
97
110
-13
Autonomous factors
Autonomous factors are formed of all the items in the Eurosystem balance sheet that are not related to monetary policy, and,
therefore, are not under the direct control of the ECB. In the computation of autonomous factors, we followed the same approach
used by the ECB in the publication of the daily liquidity data. The difference between autonomous factor items on the assets side and
those on the liabilities side is usually negative (as the system is structurally short of liquidity) and represents the amount of liquidity
the system needs owing to factors not related to monetary policy. This amount, together with the reserve requirement forms the
liquidity needs ie, the total amount of liquidity absorbed by the system on a daily basis for its functioning.
The ECB prefers to show Autonomous Factors net of the amount of monetary policy portfolios, which is an injection of liquidity
(therefore, it reduces the absorption of liquidity by autonomous factors). Note that on the liquidity supply side, the ECB shows the
amount of OMO liquidity net of the monetary policy portfolios as well.
19 May 2015
EONIA FIXING
The sharp drop in the Eonia fixing last week (-13.7bp on Wednesday and -14.3bp on Thursday) was mainly due to the public
holiday for the Ascension Day in some eurozone countries. Indeed, volumes dropped to about 10bn on both days, probably
some transactions that usually are closed at higher-than-market rates were not reported in those two days and this would
explain the decline in the fixing. On Friday, volumes increased to 20bn and the fixing rose as well to -11bp. Given the current
level of the surplus, stable at about 300bn, we believe that a fair level for the Eonia fixing should be -9bp/-10bp.
FIGURE 16
Liquidity surplus ( bn) and Eonia (bp)
180
160
140
FIGURE 17
Eonia: max, min and average in each MP (%)
EONIA - MP average
EONIA - MP stdev
Refi rate, bp
Liquidity surplus, rhs
120
900
800
700
600
100
500
80
400
60
1.75
1.50
1.25
1.00
0.75
300
0.50
20
200
0.25
100
0.00
40
-20
Jul-09
0
Jul-11
Jun-13
May-15
-0.25
May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15
Source: EMMI, ECB, Barclays Research
FIGURE 18
Eonia and liquidity surplus in the era of negative depo rate
FIGURE 19
Liquidity surplus ( bn) and Eonia volume ( bn)
Since June RP - depo rate at 10bp

Since Sep RP - depo rate at 20bp
17-May-15
6
4
Eonia (bp)
2
0
1000
Eonia Volume, eur bn, 20d mov av. RHS

800
40
400
-4
30
-6
200
-8
-12
-14
60
50
600
-2
-10
70
Liquidity surplus, eur bn, LHS
y = -0.0389x + 2.212
R = 0.6308
70 90 110 130 150 170 190 210 230 250 270 290 310
Liquidity Surplus (Eur bn)
Note: The end-of-month data are not considered in the analysis.

19 May 2015
20
0
-200
Jan-08
10
Mar-09
Jun-10
Sep-11
Dec-12
0
Feb-14 May-15
Source: EMMI, ECB, WMBA, Barclays Research
10
EURIBOR FIXINGS
The 3m Euribor remained stable at -0.9bp last week. It has started the current week 0.2bp down to -1.1bp. We expect the fixing
to keep creep down probably towards -2bp by June and towards -5bp by the end of the year. Risks are tilted to the downside as
the fixing could move even lower than our target level in case of a further contraction of the credit spreads. In the focus section,
we discuss about the decomposition of the 3m Euribor and the possible movement of its components. With the ECB remaining
accommodative for a long period and the liquidity surplus staying at elevated levels well beyond the natural conclusion of the QE
program (September 2016), we expect the 3m Euribor to remain at very low levels for a long period (barring a worsening of the
market sentiment due, for example, to an accident in Greece).
FIGURE 20
Euribor fixing curve (%)
0.3
FIGURE 21
Euribor fixings: weekly, monthly and 3-month changes (bp)
18-May-15
Start of QE implementation - 9 March
ECB's QE announcement - 22 January
2.0
0.2
-2.0
0.168
0.1
0.0
0.0
-0.2
-0.6
-4.0
-4.3
-6.0
6
tenors (months)
12
-14.0
-8.5
-11.4
1-week change
1M
1-month change
3M
Source: EMMI, Barclays Research
Source: EMMI, Barclays Research
FIGURE 22
Euribor rates: 3m versus 6m (bp)
FIGURE 23
Euribor rates: 3m versus 12m (bp)
40
6M
3-month change
12M
40
3m vs. 6m
35
3m vs. 6m
35
30
30
25
25
20
20
15
15
10
10
-5
-10
Jan-07
-5.4
-6.6
-12.0
-0.051
0
-4.9
-10.0
-0.011
-0.1
-4.6
-8.0
0.056
0.0
-5.0
-0.5
-5
May-08
Oct-09
Source: EBF, Barclays Research
19 May 2015
Mar-11
Jul-12
Dec-13 May-15
-10
Jan-07
May-08
Oct-09
Mar-11
Jul-12
Dec-13 May-15
11
SHORT RATES
The OIS curve and the future strips have remained steep. 3y OIS rate has approached zero from -15bp as of mid-April (the
1y1y Eonia forward has moved further up to about -6bp). The very front-end rates are broadly unchanged as they depend on
the current liquidity conditions, which have slightly improved with the surplus that has moved just above 300bn.
Interestingly, on the Euribor futures curve, the upward movement has also involved white contracts, with September and
December 2015 futures currently pricing in the 3m fixing at zero and 1bp, respectively. Such pricing action is not consistent
with expectations of a massive increase in excess liquidity in the coming months, as a consequence of the QE purchases, that
would push the Eonia fixing towards the depo rate.
The recent increase in the term premium reflects the uncertainty discounted by the market regarding the evolution of policy
rates as well as the liquidity conditions that affect the OIS vs refi rate spreads and the developments in the credit risk
component embedded in the money markets rates. Our analysis (see focus section) suggests that the change in the size of
the term premium over the past month is mainly due to the increase in the OIS rates, which should mainly reflect a change in
monetary policy expectations as, given the expected massive increase in the liquidity surplus, the OIS vs refi should remain
broadly unchanged. We could estimate that the increase in the term premium for 2017 should be broadly consistent with
expectation of a 25bp policy rate hike by mid-2017. We regard such expectations for policy rates as too aggressive, especially
for the 2016 and probably also for 2017 tenors, given the expected moderate dynamic for inflation. For longer maturities, it is
premature to have a clear view on the possible monetary policy decision. Therefore, we regard the current level of the 1y1y
eonia forward as too high and therefore suggest receiving it. On the Euribor strip, contracts in 2016 are too cheap, in our
view, compared to our expectations for policy rates. Also, 12bp of red vs whites contracts spread look too wide, in our view.
We expect a correction of the current monetary policy expectations that would imply a tightening of such a spread in the
near term.
Uncertainty over policy rates is much higher in 2018 since there could be a monetary policy tightening on policy rates while
the reduction in the surplus is unlikely to be aggressive enough to bring the excess of reserve to a level that could affect the
3m OIS, thus reducing its spread vs. the refi rate. The size of the term premium for the 2018 tenor, while too big over the past
month, is therefore justified by the greater uncertainty around the monetary policy in the medium term with risks on policy
rates skewed to the upside given the current low level. Therefore, the money market curve (blue vs reds spread) is likely to
remain steep.
FIGURE 24
Eurosystem reserve period, ECB-dated Eonia forward rates and our expectations on Eonia fixing (bp)
Reserve period
ECB
Month meeting
Start
date
Main liquidity events
"Turn-of- 1st 3y
2nd 3y
the-month" LTRO
LTRO
days
maturity maturity
End date Length
1 (quarterend)
Jun15
03-Jun
10-Jun
21-Jul
42
Jul15
16-Jul
22-Jul
08-Sep
49
Sep15 03-Sep
09-Sep
27-Oct
49
1 (quarterend)
Oct15
28-Oct
08-Dec
42
22-Oct
Dec15 03-Dec-
09-Dec 26-Jan-16
49
1 (year-end)
TLTROs
(allotm)
Jun TLTRO*
Sep
TLTRO*
Dec
TLTRO*
Barclays forecasts
Refi Depo
Rate Rate EONIA**
Market expectations on ECB-dated Eonia
Current
expectations
1W
Mid-Dec. Spread between
change change two consecutive
(bp)
(bp)
ECB meetings
-20
-11.0
-11.3
0.3
-0.1
-20
-12.5
-12.2
0.6
-0.2
-0.9
-20
-14.9
-12.7
0.7
0.4
-0.5
-20
-16.9
-12.9
0.8
0.9
-0.2
-20
-15.8
-12.9
0.8
0.4
0.0
Note: *Barclays expectations, no official date for the TLTROs in 2015 and 2016 is available. **average in the reserve period.
19 May 2015
12
18-May-15 11-May-15 20-Apr-15

1w
2w
3w
1m
2m
3m
4m
5m
6m
7m
8m
9m
10m
11m
12m
-11.7
-10.3
-10.6
-10.9
-11.4
-11.7
-11.8
-11.9
-12.0
-12.1
-11.9
-12.0
-11.9
-11.8
-11.7
-9.8
-9.9
-9.1
-9.5
-10.3
-10.9
-11.3
-11.5
-11.7
-11.9
-11.9
-12.1
-12.3
-12.3
-12.3
-9.4
-8.9
-9.7
-9.7
-10.9
-11.9
-12.5
-12.9
-13.2
-13.4
-13.7
-13.6
-13.8
-14.0
-14.1
1w chg
-1.9
-0.4
-1.5
-1.4
-1.1
-0.8
-0.5
-0.4
-0.3
-0.2
0.0
0.1
0.4
0.5
0.6
FIGURE 26
OIS curve (bp)
1m chg
-2.3
-1.4
-0.9
-1.2
-0.5
0.2
0.7
1.0
1.2
1.3
1.8
1.6
1.9
2.2
2.4
2.5
0.0
18-May-15
11-May-15
20-Apr-15
-2.5
-5.0
-7.5
-10.0
-12.5
-15.0
-17.5
-20.0
1w
2w
3w
1m
2m
3m
4m
5m
6m
7m
8m
9m
10m
11m
12m
15m
18m
21m
24m
36m
FIGURE 25
OIS curve (bp): Present and recent movements
Note: Barclays official forecast on the ECBs refi rate is up to the end of 2015.
FIGURE 27
FRA/Eonia: spot and forwards
FIGURE 28
Fra/Eonia: past developments and forwards indications (bp)
18-May-15
1-w
change
1-M
change
3-M
Change
200
175
Spot
10.3
0.4
-1.7
0.9
Jun15 Fwd
11.1
-0.4
-3.4
-0.1
150
Sep15 Fwd
12.4
0.2
-2.6
-2.2
125
Dec15 Fwd
12.6
0.0
-2.4
-2.5
Mar16 Fwd 12.8
-0.1
-2.3
-2.5
Jun16 Fwd
13.5
-0.2
-1.7
-2.1
Sep16 Fwd
13.9
-0.1
-1.3
-2.0
100
3m Fra/Eonia - spot
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
75
50
25
0
Jan-08 May-09 Sep-10 Feb-12 Jun-13 Nov-14 Mar-16
19 May 2015
13
FIGURE 29
Euribor strip (bp)
Contract
date
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
FIGURE 30
Evolution of Euribor strip since the QE announcement (bp)
Implied
3M rate
Change vs
last week
(bp)
-0.5
0.5
1.5
2.5
4.5
6.5
10.5
15.0
19.5
25.0
30.5
36.5
43.0
0.0
1.0
2.0
2.0
2.0
1.5
1.5
2.0
1.5
1.5
1.5
1.5
2.5
50
Changes vs.
Barclays
last month forecasts on
(bp)
3M Euribor
-1.0
0.0
1.5
3.0
5.5
7.0
10.0
13.0
15.0
18.0
20.0
22.5
25.0
45
18-May-15
40
11-May-15
35
-1
-3
-5
-7
20-Apr-15
30
25
3m Euribor - Barclays
Forecasts
20
15
10
5
0
-5
-1-3
-10
May-15
-5
-7
Feb-16
Oct-16
Jul-17
Apr-18
FIGURE 31
1y1y Eonia forward in the US and in the eurozone (%)
FIGURE 32
Rates differential (bp)and Eur vs. USD
1.40
30
1.45
1.20
10
1.4
1.00
-10
0.80
-30
0.60
-50
0.40
-70
0.20
-90
0.00
-110
Eur-Us, 1y1y OIS fwd diff, bp
-130
Eur/usd, rhs
-0.20
Jun-12
May-13
May-14
Eur 1y1y fwd OIS, %
May-15
1.35
1.3
1.25
1.2
-150
Jun-12
Usd 1y1y fwd OIS, %
1.15
1.1
May-13
1.05
May-15
May-14
FIGURE 33
OIS forwards: summary of the latest movements (changes in bp)
EUR
3m OIS
US
Current (%)
1w ch
1m ch.
3m ch.
Current (%)
spot
-0.12
-1
-2
3m fwd
-0.12
6m fwd
-0.12
12m fwd
-0.11
Current (%)
spot
1y fwd
UK
1w ch
1m ch.
3m ch.
Current (%)
1w ch
1m ch.
3m ch.
0.14
0.46
0.20
-2
0.47
0.27
-3
-1
0.52
-3
0.42
-5
-2
0.73
-5
1w ch
1m ch.
3m ch.
Current (%)
1w ch
1m ch.
3m ch.
Current (%)
1w ch
1m ch.
3m ch.
-0.12
0.29
-2
-1
0.0
0.51
-2
0.0
-0.06
0.93
-12
0.0
0.92
-8
14
0.0
2y fwd
0.03
15
12
1.54
-18
12
0.0
1.36
-9
26
0.1
3y fwd
0.13
21
16
1.95
-18
20
0.1
1.61
-11
31
0.1
1y OIS
19 May 2015
14
EURO AREA T-BILLS

~No major changes in the t-bill markets, despite the increase in volatility in the EGBs market. At the 6m tenor the Italian 6m BOT
trades in marginally negative territory, while at the 12m tenor it trades in marginally positive territory, 2bp cheaper than the
Spanish 12m Letras at about 2bp. Almost all core papers are below the depo rate up to the 10m tenor.
FIGURE 34
T-bill auctions in the next two weeks
Date
Country/Issuer
Bill description
Mon 18-May-15
Germany
12m Bubill
Mon 18-May-15
Holland
20May15 & 31Jul15
Amount ( bn)
Settlement date
Bids in time
1.5
20-May-15
10:00
1-2;1-2
20-May-15
10:30
2.6-3.0;1.2-1.6;1.0-1.4
20-May-15
13:50
3-4 (exp)
22-May-15
09:30
Mon 18-May-15
France
BTF 12Aug15, 28Oct15,27Apr16
Tue
Spain
3m & 9m Letras
Wed 20-May-15
Portugal
BT 20Nov15, New 20May16
1.0-1.25
22-May-15
10:30
Mon 26-May-15
France
BTF auctions
7.0 (exp)
28-May-15
13:50
Tue
19-May-14
26-May-15
Italy
CTZ Feb17
2.0 (exp)
28-May-15
10:00
Wed 27-May-15
Italy
6m BOT
5.5 (exp)
29-May-15
10:00
Source: National Treasuries, Barclays Research
FIGURE 35
6m tenor: yields by country (%)
FIGURE 36
12m tenor: yields by country (%)
0.10
0.15
0.05
0.10
0.00
-0.05
0.00
0.05
-0.02
-0.10
-0.15
-0.12
-0.20
0.01
0.00
-0.19
-0.25
-0.05
-0.10
-0.15
-0.21
-0.27
-0.30
0.00
-0.12
-0.20
-0.27
-0.17
-0.18
FR
BE
-0.25
-0.35
-0.27
-0.30
-0.40
SP
IT
19 May 2015
FR
BE
HO
DE
6 m OIS
IT
SP
DE
12m OIS
15
SECURED REPO MARKET RATE

Repo market activity is mainly concentrated at the short maturities, up to 1-month. At longer tenors, the market is very thin.
There is no evidence of shortage of collateral yet, although the velocity of the circulation has slowed down and this is fuelling
downward pressure on GC rates.
At the very front end, the demand for peripheral collateral is good, because of the pick-up it offers vs. core collateral, and this
explains the tightening of the spread vs. the German GC rates. At longer maturities, the GC curves diverge, with the core ones
inverted while the peripheral one has a mildly steep shape.
FIGURE 37
GC repo curves selected countries (bp)
FIGURE 38
Evolution of GC rates since the introduction of negative depo
rate
1.40
DE - Repo GC curve
-5
1.20
FR - Repo GC curve
1.00
IT - Repo GC curve
-10
Overnight Eonia
DE - O/N
FR - O/N
IT - O/N
0.80
0.60
-15
0.40
-20
0.20
0.00
-25
-0.20
-30
S/N
1w
1M
3M
-0.40
May-13
12M
FIGURE 39
ECBs PSPP purchases by country (as of end of April 2015)
since the start of the programme on March 9, 2015
25
Sep-14
May-15
FIGURE 40
ECBs PSPP purchases average maturity by country (as of
end of April 2015) (years)
12
22
11
10
10
20
Jan-14
17
15
15
11 11
7
6
10
4
5
2
LI
LU
LAT
FI
HO
FR
GE
AT
SLO
LU
LAT
SLO
SLK
FI
IR
PO
BE
AT
SP
HO
SUP
IT
FR
GE
IT
SUP
MA
IR
BE
SP
SLK
PO
LI
MA
Note: Purchases of Govies/agencies as well as Supranational (SUP)
19 May 2015
16
APPENDIX: HAIRCUTS AT THE ECB

Haircut schedule for eligible collateral at Eurosystem market operations
FIGURE 41
Marketable assets with ratings from AAA to A-, %; from 1 October 2013
Category 1
Residual
maturity (y)
Category 2
Category 3
Category 4
Category 5
Fixed
coupon
Zero
coupon
Fixed
coupon
Zero
coupon
Fixed
coupon
Zero
coupon
Fixed
coupon
Zero
coupon
0-1
0.5
0.5
1.0
1.0
1.0
1.0
6.5
6.5
10.0
1-3
1.0
1.5
2.5
2.0
3.0
8.5
9.0
10.0
3-5
1.5
2.5
2.5
3.5
3.0
4.5
11.0
11.5
10.0
5-7
2.0
3.0
3.5
4.5
4.5
6.0
12.5
13.5
10.0
7-10
3.0
4.0
4.5
6.5
6.0
8.0
14.0
15.5
10.0
>10
5.0
7.0
8.0
10.5
9.0
13.0
17.0
22.5
10.0
FIGURE 42
Marketable assets with rating: BBB+/BBB-, %
Category 1
Residual
maturity (y)
Category 2
Category 3
Category 4
Category 5
Fixed
coupon
Zero
coupon
Fixed
coupon
Zero
coupon
Fixed
coupon
Zero
coupon
Fixed
coupon
Zero
coupon
0-1
6.0
6.0
7.0
7.0
8.0
8.0
13.0
13.0
22
1-3
7.0
8.0
10.0
14.5
15.0
16.5
24.5
26.5
22
3-5
9.0
10.0
15.5
20.5
22.5
25.0
32.5
36.5
22
5-7
10.0
11.5
16.0
22.0
26.0
30.0
36.0
40.0
22
7-10
11.50
13
18.5
27.5
27.0
32.5
37.0
42.5
22
>10
13
16
22.5
33.0
27.5
35.0
37.5
44.0
22
FIGURE 43
Level of valuation haircuts applied to eligible non-marketable assets (%)
Credit Claims (PD<= 0.4%~)
Residual
maturity
Fixed interest payments and a

valuation based on theoretical
price assigned by the NCB
Credit claims
Credit claims
Fixed interest payments and a valuation (PD between 0.4% (PD between 1%
according to the outstanding amount
and 1%)
and 1.5%)
assigned by the NCB
AAA/A-
BBB+/BBB-
AAA/A-
BBB+/BBB-
BB+/BB
BB-
0-1
10.0
17.0
12.0
19.0
42.0
54.0
1-3
12.0
29.0
16.0
34.0
62.0
70.0
3-5
14.0
37.0
21.0
46.0
70.0
78.0
5-7
17.0
39.0
27.0
52.0
78.0
83.0
7-10
22.0
40.0
35.0
58.0
78.0
84.0
>10
30.0
42.0
45.0
65.0
80.0
85.0
Definition of liquidity categories:

Category I: Central government debt instruments and debt instruments issued by central banks (1)
Category II: Local and regional government debt instruments, Jumbo covered bonds, agency debt instruments (2) and supranational debt instruments
Category III: Traditional covered bank bonds, structured covered bank bonds, multi-cdulas and debt instruments issued by corporate and other issuers.
Category IV: Credit institution debt instruments (uncovered)
Category V: Asset-backed securities
(1) Debt certificates issued by the ECB and debt instruments issued by national central banks prior to the adoption of the euro in their respective Member State.
(2) Only marketable assets issued by issuers that have been classified as agencies by the ECB are included in liquidity Category II.
Marketable assets issued by other agencies are included in liquidity Category III.
Note: Individual asset-backed securities, covered bank bonds (jumbo covered bank bonds, traditional covered bank bonds and other covered bank bonds) and
uncovered bank bonds that are theoretically valued in accordance with Section 6.5 are subject to an additional valuation haircut. This haircut is directly applied at the
level of the theoretical valuation of the individual debt instrument in the form of a valuation markdown of 5%. Furthermore, a valuation markdown is applied to
retained covered bonds. This valuation markdown is 8% for retained covered bonds in CQS 1 & 2 and 12% for retained covered bonds in CQS 3.
Source for all tables: ECB, Barclays Research
19 May 2015
17
Analyst Certification
We, Giuseppe Maraffino and Huw Worthington, hereby certify (1) that the views expressed in this research report accurately reflect our personal views
about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or
indirectly related to the specific recommendations or views expressed in this research report.
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Barclays UPDATE Euro Money Markets Weekly Reading The 3m Euribor Decomposition

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Barclays UPDATE Euro Money Markets Weekly Reading The 3m Euribor Decomposition

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Interest Rates Research

Euro Money Markets Weekly

Reading the 3m Euribor decomposition

Eurosystem liquidity conditions

Short rates snapshot

Appendix: Haircuts at the ECB

Barclays | Euro Money Markets Weekly

Reading the 3m Euribor decomposition

Volatility of bunds has

Source: Barclays Research

Source: Barclays Research

Barclays | Euro Money Markets Weekly

Term Premium - 14 May 2015

Source: Bloomberg, ECB, Barclays Research

The ECBs monetary policy: We expect it to remain accommodative

OIS vs refi spread: A function of the excess of liquidity

Barclays | Euro Money Markets Weekly

Euribor vs OIS spread

Term Premium - 14 May 2015

Term Premium - 16 April 2015

Source: Bloomberg, ECB, Barclays Research

Barclays | Euro Money Markets Weekly

Barclays | Euro Money Markets Weekly

EUROSYSTEM LIQUIDITY CONDITIONS

Facts in the reserve

MRO roll (90.6bn

Barclays | Euro Money Markets Weekly

Liquidity conditions (I): OMO liquidity

Source: ECB, Barclays Research

Source: ECB, Barclays Research

LTROs longer than 3m

Sep-08 May-10 Aug-11 Nov-12 Feb-14 May-15

Source: ECB, Barclays Research

Barclays | Euro Money Markets Weekly

Liquidity conditions (II): ECBs asset purchases programmes

Claims on non resident in

Other claims on banks in (ELA)

Source: ECB, Barclays Research

Change since the QE

Source: ECB, Barclays Research

Barclays | Euro Money Markets Weekly

Liquidity conditions (III): autonomous factors (as of Friday, 08 May)

Source: ECB, Barclays Research

Autonomous liquidity factors (A)

Autonomous liquidity factors ( C )

Net foreign assets

Governments deposits (L.5.1)

Other Autonomous factors (net)

Monetary Policy Instruments (B)

Monetary Policy Instruments (D)

Reserve Requirement (L.2.1)

Excess reserve (L.2.1)

Absorbing operations (L.2.3+L.2.4)

Deposit facility (L.2.2)

Source: ECB, Barclays Research

Barclays | Euro Money Markets Weekly

Liquidity surplus, rhs

Source: EMMI, ECB, Barclays Research

Source: EMMI, ECB, Barclays Research

Since June RP - depo rate at 10bp

Eonia Volume, eur bn, 20d mov av. RHS

Liquidity surplus, eur bn, LHS