Bloomberg News

Money Market Indicators Signals Banking Sector Stress Stable

April 27, 2012

Money-market indicators signaled the ability of banks to borrow and lend short term funds increased with the gap between the London interbank offered rate and the Federal funds rate narrowing.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.4659 percent, unchanged from yesterday, according to the British Bankers’ Association.

The Libor-OIS spread, a gauge of banks reluctance to lend, was 32.4 basis points from 32.7 basis points yesterday. The gap was as high as 51 basis points this year on Jan. 6. Overnight index swaps, or OIS, give traders predictions on where the Fed’s effective funds rate will average for the term of the swap. The central bank’s target rate is set in a range of zero to 0.25 percent.

Predictions in the forward market for Libor-OIS, known as the FRA/OIS spread, was little changed at 33.5 basis points for June, according to UBS AG data. The spread is up from 30 basis points on March 1.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed to 29.81 basis points from 30.31 basis points. The gap is a gauge of investors’ perceptions of U.S. banking sector credit risk as swap rates are derived from expectations for dollar Libor. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market rose. The three-month cross-currency basis swap was 45 basis points below Euribor, compared to 44.5 basis points below yesterday. The basis swap rate was minus 162.5 basis points on Nov. 30.

Euribor-OIS Spread

The market for corporate borrowing through U.S. commercial paper contracted. The seasonally adjusted amount of U.S. commercial paper declined $6.7 billion to $925.9 billion outstanding in the week ended April 25, the third fall in four weeks, according to Federal Reserve data compiled by Bloomberg. Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as paying rent and salaries.

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, rose. The measure of banks’ reluctance to lend to one another was 40 basis points from 39 basis points yesterday. The measure has fallen from 95 basis points at the start of the year.

Basis Swaps

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 30.2 basis points, compared to minus 29.7 yesterday. A negative swap price indicates investors are willing to receive reduced interest payments on the yen they lend in order to obtain the needed financing in dollars.

Foreign-exchange swaps are typically for periods of less than a year, while cross-currency basis swaps usually range from one to 30 years. The latter are agreements in which a person borrows in one currency and simultaneously lends in a different currency. The trade involves the exchange of two different floating-rate payments, each denominated in a different currency and based on a different index.

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

To contact the editor responsible for this story: David Liedtka at dliedtka@bloomberg.net


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