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Money-market forward indicators signal strains in short term dollar funding are easing as the rate banks borrow from one another falls and traders bet the gap over the federal funds rate will narrow.
Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, fell for a second straight session to 0.4606 percent from 0.46160 percent on June 22, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, was little changed at 28.5 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 29 basis points from 30.3 basis points on June 22, 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, narrowed 0.44 basis points to 22.63 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 58.4 basis points below Euribor, compared to 54.5 basis points below on June 22.
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 little changed at 44 basis points.
The seasonally adjusted amount of U.S. commercial paper fell $8.9 billion to $998.2 billion in the week ended June 20, the third consecutive slide, 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.
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