Bloomberg News

Money Market Stresses Abate Before Group of Eight Discussions

May 18, 2012

Money-market indicators signaled the ability of banks to borrow and lend short term funds increased as Group of Eight leaders meet to discuss Greece and its impact on the global economy.

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 for a third day, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, narrowed to 29.9 basis points from 30.2 basis points yesterday.

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, narrowed to 41.5 basis points from 42.4 basis point yesterday, according to the second rolling three month contracts.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, was little changed at 36 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 51 basis points below Euribor, compared to 49.3 basis points below yesterday.

Euribor-OIS Spread

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 38 basis points. The measure has fallen from 95 basis points at the start of the year.

The seasonally adjusted amount of U.S. commercial paper rose $27.2 billion to $993.6 billion outstanding in the week ended May 16, according to Federal Reserve data. The market for corporate borrowing through U.S. commercial paper has risen for three consecutive weeks.

The price on one-year cross-currency basis swaps between yen and U.S. dollars rose to minus 38.3 basis points from minus 35.5 basis points 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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