Bloomberg News

Dollar-Funding Stress Abates, Money-Market Indicators Show

September 04, 2012

Money-market forward indicators signaled strains in short-term dollar funding abated.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, was 0.41185 percent, down from 0.41435 percent yesterday, and the lowest since October according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, narrowed to 28.7 basis points from 28.9 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, rose to 24.9 basis points from 24 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 0.75 basis point to 16.5 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, touched 16 basis points on Aug. 31, the smallest since May 2011.

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

Company Funding

The seasonally adjusted amount of U.S. commercial paper rose $6.8 billion to $1.032 trillion in the week ended Aug. 29, 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 fell to the least since June 2011. The three-month cross-currency basis swap was 27.3 basis points below Euribor, compared with 28 basis points below yesterday.

The price on one-year cross-currency basis swaps between yen and U.S. dollars was minus 28.7 basis points, from minus 28.9 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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