Bloomberg News

Stress in Dollar-Funding Eases, Money Market Indicators Show

June 05, 2012

June 5 (Bloomberg) --Money-market forward indicators signaled strains in short-term dollar funding markets eased as Europe’s leaders continue to try find measures that will resolve the sovereign-debt crisis.

Predictions in the forward market for the London interbank offered rate-OIS, a gauge of banks’ reluctance to lend, fell, according to the so-called FRA/OIS spreads. The derivative- market prediction for the spread in September, the so-called second rolling contract, was 39.3 basis points, down from 40.3 basis points yesterday.

Three-month Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46785 percent on June 1, up from 0.46685 percent, where it had held from May 16, according to the British Bankers’ Association. There was no Libor rate published today or yesterday, as U.K. markets are closed for a public holiday. The Libor-OIS spread, a gauge of banks’ reluctance to lend, was little changed on June 1 at 30.4 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.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, narrowed 0.56 basis points to 36.75 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 55.5 basis points below Euribor, compared to 59.1 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 40 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 $20.1 billion to $1,028.6 trillion outstanding in the week ended May 30, according to Federal Reserve data. The market for corporate borrowing through U.S. commercial paper has risen for five straight weeks.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 40.4 basis points, from minus 41.5 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

To contact the editor responsible for this story: Dave Liedtka at

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