Bloomberg News

Dollar-Funding Stress Levels Ease, Money-Market Indicators Show

June 08, 2012

Money-market forward indicators signaled strains in short term dollar funding abated as banks funding costs were little changed.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46785 percent, where it has held since June 1, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, was unchanged at 30.8 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, was little changed at 36.8 basis points, 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 0.33 basis point to 31.94 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 53.4 basis points below Euribor, compared with 51.2 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 rose to 40 basis points from 38 basis points.

The seasonally adjusted amount of U.S. commercial paper fell $14.7 billion to $1.014 trillion in the week ended June 6, according to Federal Reserve data

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 37.21 basis points, from minus 35 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: Dave Liedtka at


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