Bloomberg News

Dollar-Funding Stress Eases, Money-Market Indicators Show

July 11, 2012

Money-market forward indicators suggest strains in short term dollar funding eased.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.45610 percent, down from 0.45760 percent yesterday, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, narrowed to 28.9 basis points from 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.

Predictions in the forward market for Libor-OIS, known as the FRA/OIS spread, narrowed to 29.4 basis points from 32.3 basis points yesterday, 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 1.44 basis points to 24.06 31.13 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 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 52 basis points below Euribor, compared to 57.5 basis points below yesterday.

Euribor-OIS Spread

The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was little changed. The measure of banks’ reluctance to lend to one another held at 39 basis points from 38 basis points.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 34 basis points, from minus 34.2 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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