Bloomberg News

U.S. Banking Sector Stress Eases, Money Market Indicators Show

May 25, 2012

Money-market indicators signaled stresses in U.S. short-term funding markets eased even as concern increases the Europe’s debt crisis may be worsening.

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, as it has remained since May 16, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, narrowed to 30.9 basis points from 31 basis points.

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 38.3 basis points from 39.44 basis points 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, widened 0.38 basis points to 34.75 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 increased. The three-month cross-currency basis swap was 47.1 basis points below Euribor, compared to 45.4 basis points below yesterday.

Euribor-OIS Spread

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, widened. The measure of banks’ reluctance to lend to one another was 40 basis points compared to 39 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 $14.9 billion to $1.009 trillion in the week ended May 23, according to Federal Reserve data. That’s the highest level since $1.03 trillion on Sept. 21, while the fourth straight weekly increase is the longest streak since the period ended Feb. 8.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 36.2 basis points, compared with 37.2 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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