(Corrects the amount of securities in first paragraph.)
Forward markets signaled strains in short-term dollar funding will edge higher as the scandal surrounding the London interbank offered rate threatens the benchmark’s credibility and its roles in pricing more than $360 trillion in global securities.
Predictions in the forward market for the gap between the London interbank offered rate and federal funds, known as Libor- OIS, rose to 32.8 basis points from 32.2 basis points yesterday, according to the second rolling three month so-called FRA/OIS spread. The forward spread has widened nearly 11 percent since touching an almost four-month low on July 4 at 29.6 basis points.
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, where it had held since July 6, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, was unchanged at 29.1 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 difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened 0.35 basis point to 26 basis points. The gap, 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 this 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 Federal Reserve 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 57.5 basis points below Euribor, compared with 58.6 basis points below yesterday.
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 40 basis points, the lowest since June 14.
The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 34.8 basis points, from minus 35.7 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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