Bloomberg News

Derivatives Show Money-Market Stress Rises as Euro Summit Opens

June 28, 2012

Forward markets signaled increased stress in the money markets as European leaders began a two-day summit on the region’s debt crisis.

Predictions in the forward market for the gap between the London interbank offered rate and federal funds, known as Libor- OIS, rose to 33.2 basis points from 31.3 basis points yesterday, according to the second rolling three month so-called FRA/OIS spread.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened 1.5 basis points to 25 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.

European Union leaders are struggling to reach a consensus on how to safeguard governments in Spain and Italy, with German Chancellor Angela Merkel rejecting calls to do more to cut their borrowing costs.

Banks shares slid after Barclays Plc (BARC) was fined 290 million pounds ($451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting yesterday it submitted false London and euro interbank offered rates. Authorities are pursuing sanctions in the global investigation of more than a dozen lenders.

Libor Scandal

Traders at the U.K.’s second-biggest bank by assets routinely coordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to documents released yesterday by the U.S. Commodity Futures Trading Commission, the U.S. Justice Department and the U.K. Financial Services Authority.

The benchmarks included the Libor and Euribor, a related euro-denominated rate. In both cases, the goal was to generate profits on derivatives held by the banks, the agencies said.

Three-month Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.46060 percent, where it had held since June 25, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, was little changed at 28.1 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 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 59 basis points below Euribor, compared to 57.6 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 little changed at 42 basis points.

The seasonally adjusted amount of U.S. commercial paper rose $10.1 billion to $1.008 trillion in the week ended June 27, reversing a three-week trend of declines, according to Federal Reserve data.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was little changed at minus 35.4 basis points. 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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