Bloomberg News

Money-Market Indicators Mixed on Dollar-Funding Stress Levels

July 09, 2012

Money-market forward indicators signaled short-term dollar funding conditions were mixed.

The three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.45760 percent, unchanged, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks’ reluctance to lend, was little changed at 29.3 basis points. The spread is down from as high this year as 50.5 basis points, touched on Jan. 6.

Overnight index swaps, or OIS, give traders predictions on where the Federal Reserve’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, widened 1.44 basis points to 32.44 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 one basis point to 26.06 basis points. The gap, which is a gauge of investors’ perceptions of U.S. banking- sector credit risk as swap rates are derived from expectations for dollar Libor, is up from the year’s low of 22 basis points reached on June 27.

Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities.

The seasonally adjusted amount of U.S. commercial paper fell $35.8 billion to $972.5 billion in the week ended July 4, according to Fed data.

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 58.5 basis points below Euribor, compared with 59 basis points below on July 6.

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 43 basis points, from 42 basis points on July 6.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 36.4 basis points, from minus 34.4 basis points on July 6. 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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