Bloomberg News

Money Market Stresses Ease Ahead of European Leaders Meeting

May 22, 2012

Money-market indicators signaled strains in short-term funding dissipated before European leaders meet tomorrow in Brussels to address the region’s fiscal crisis.

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 the fifth straight day, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, narrowed to 30.3 basis points from 30.5 basis points yesterday.

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, narrowed to 38.2 basis points from 38.3 basis point yesterday, according to the second rolling three month contracts. The spread is in from as wide as 46.1 basis points this quarter on May 15.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed 1.4 basis points to 33.75 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 decreased. The three-month cross-currency basis swap was 45 basis points below Euribor, compared to 50.7 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 for the 13th day, the lowest since Aug. 1. The measure has fallen from 95 basis points at the start of the year.

The seasonally adjusted amount of U.S. commercial paper surged $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 straight weeks.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 35.2 basis points compared with minus 36.1 basis point 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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