Bloomberg News

Money Market Indicators Signal Banking-Sector Stress Is Stable

May 03, 2012

Money-market indicators signaled the ability of banks to borrow and lend short term funds remained stable, with the rate London-based banks say they pay for three- month dollar loans unchanged for the seventh straight day.

The three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46585 percent, unchanged from yesterday, according to the British Bankers’ Association. The rate is down from as high this year of 0.5825 percent on Jan. 3.

The Libor-OIS spread, a gauge of banks’ reluctance to lend, was unchanged at 32.2 basis points, or 0.32 percentage point. The gap was as wide as 51 basis points this year on Jan. 6. Overnight index swaps, or OIS, give traders predictions on where the Federal Reserve’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, were little changed at 32.75 basis points for June, compared with 32.5 basis points yesterday, according to UBS AG data.

The gap between the two-year swap rate and the comparable- maturity Treasury note yield, known as the swap spread, was 28.54 basis points from 28.19 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.

Cross-Currency Swaps

The cost for European banks to convert euro-denominated payment streams into dollar-based funding via the cross currency swaps market rose. The three-month cross-currency basis swap was 44 basis points below Euribor, compared with 43.5 basis points below yesterday. The basis swap rate touched negative 162.5 basis points on Nov. 30.

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

The price on one-year cross-currency basis swaps between yen and U.S. dollars was negative 29.1 basis points, compared with minus 28.8 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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