Dealers anticipate further Eonia volatility

Since the financial crisis, large infusions of European Central Bank liquidity have kept the eurozone banking sector functioning smoothly. But as banks recover their health and reduce their liquidity take-up, short-term interest rate traders could be in for a bumpy ride. By Michael Watt

For something that had been virtually moribund for the first six months of the year, the euro overnight index average (Eonia) is catching traders out with increasing regularity. Unexpected reductions in excess liquidity in the European market have sent Eonia spiking on several occasions since the end of June, leaving short-term interest rate traders scrambling to reposition themselves. Even more surprisingly for some, Eonia has remained stubbornly high since October 13, confounding those who had