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Money-market indicators signaled increased stress in the market for borrow and lend short-term funds as Greek politicians struggled to form a government, fueling concern the nation may leave Europe’s currency union.
The Libor-OIS spread, a gauge of banks reluctance to lend, traded in the forward market widened to 35.4 basis points, the June so-called FRA/OIS spread shows, from 33.4 basis points yesterday.
The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened to 33.44 basis points, the most since January. 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.
Greece, which has 436 million euros ($564 million) of debt coming due on May 15, is struggling to form a government after weekend elections. Syriza party leader, Alexis Tsipras, told his political rivals they must renounce support for the European Union-led bailout if there’s to be any chance of forging a coalition. Tsipras meets today with leaders of the pro-austerity New Democracy and Pasok parties.
Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46685 percent, up from 0.46585 percent yesterday and each day since April 24, according to the British Bankers’ Association.
The Libor-OIS spread, a gauge of banks reluctance to lend, narrowed to 31.3 basis points from 31.9 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.
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 47.5 basis points below Euribor, compared to 46.9 basis points below yesterday. The basis swap rate was minus 162.5 basis points on Nov. 30.
The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was little changed. The measure of banks’ reluctance to lend to one another was 38 basis points, near the lowest since August.
The market for corporate borrowing through U.S. commercial paper expanded the most in four months in the most recent weekly data provided by the Federal Reserve. The seasonally adjusted amount of U.S. commercial paper jumped $14.1 billion to $939.9 billion outstanding in the week ended May 2. Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as paying rent and salaries.
The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 30.7 basis points, compared to minus 30.1 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 email@example.com