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Euro zone interbank lending rate drops to lowest on record

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[June 10, 2014]  By John Geddie

LONDON (Reuters) - Euro zone overnight interbank interest rates fell to their lowest levels on record on Tuesday, while a sharp rally in government bonds started to ease for some countries.

Strategists said money markets were continuing to adjust to last week's cut in the European Central Bank's main interest rates and its promise of fresh liquidity for banks, which should help short-term rates stable.

"The ECB has given very strong forward guidance for the first two years, and all its measures work to pin front-end rates," said Michael Michaelides, rates strategist at RBS.

Spot Eonia <EONIA=> fixed at 0.053 percent after markets closed on Monday, dropping below the previous historic low set in February 2013.

The European Central Bank cut all its main rates to record lows on Thursday, imposing for the first time negative interest rates on cash parked by banks at the ECB in an attempt to force them to increase lending to companies and consumers.
 


Other steps included the injection of around 170 billion euros into the banking system by halting tenders that withdrew funds spent on past government bond purchases, and a 400 billion euro ($544.86 billion) long-term loan scheme.

The tenders will be abandoned from next week, while the ultra-cheap four-year loans for banks - conditional on their lending to the smaller companies that are Europe's economic backbone - will be available from September.

Longer-term government bond markets saw a three-day rally since the ECB's meeting starting to peter out.

Greek bonds <GR10YT=RR> were the best performers, with 10-year yields dropping 15 bps to 5.58 percent, a level not seen since January 2010.

These new lows raise the prospect that Greece, which returned to markets in April for the first time since 2010, could soon issue more debt to help to stave off the need for a third bailout, Commerzbank said in a note on Tuesday.

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Greece's government named economist Gikas Hardouvelis as finance minister in a cabinet reshuffle on Monday, signaling its intent to keep up a difficult reform drive demanded by the international lenders funding the country.

Elsewhere in the bloc, Italy's 10-year yields <IT10YT=RR> rose 4 bps to 2.74 percent from Monday's record low while Spain's <ES10YT=RR> dropped 2 bps to a new low of 2.57 percent.

Germany's 10-year yield - the benchmark for euro zone bonds - was unchanged at 1.38 percent <DE10YT=RR>.

(Editing by Catherine Evans)

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