Bloomberg News

Dollar-Funding Stress Rise on Week, Money-Market Indicators Show

November 16, 2012

Money-market forward indicators signaled short-term dollar funding conditions rose this week.

Three-month London interbank offered rate, or Libor, which represents the rate at which banks say it would cost to borrow from another, rose to 0.3115 percent, from the 0.3110 percent level the day before, according to the British Bankers’ Association. On Nov. 9, the Libor was 0.31 percent. The Libor- OIS spread, a gauge of banks reluctance to lend, rose to 16.4 basis points from 15.8 basis points, yesterday.

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, was 20.9 basis points compared with 20.2 basis points yesterday, according to the second rolling three month contracts. The spread has widened from 18.25 basis points at the end of last week.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened to 14 basis points, from 13.25 basis points yesterday. The gap, a gauge of investors’ perceptions of U.S. banking sector credit risk as swap rates are derived from expectations for dollar Libor, was at 12.1 basis points at the end of last week.

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 rose $5 billion to $968.6 billion in the week ended Nov. 14, according to Federal Reserve data.

Euribor-OIS Spread

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market rose. The three-month cross-currency basis swap was 30.3 basis points below Euribor, compared with 29.3 basis points below yesterday. The swaps were at 26.8 basis points below Euribor on Nov. 9.

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.

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 rose 12.3 basis points from 11.6 basis points yesterday.

Repo Rates

The overnight Treasury general collateral repurchase agreement rate opened today at 0.27 percent, according to ICAP Plc, the world’s largest inter-dealer broker.

The average rate for borrowing and lending Treasuries for one day in the repo market was 0.26 percent yesterday, according to index data provided on a one-day lag by the Depository Trust & Clearing Corp. That was little changed from the day before. The rate was at 0.127 percent at the start of the year.

The DTCC index is a weighted average of all general collateral repo transactions during a day. The DTCC processes over $3 trillion in repos transactions daily.

Securities dealers use repos to finance holdings and increase leverage. Securities that can be borrowed at interest rates close to the Fed’s target rate are called general collateral. Those in highest demand have lower rates and are called “special.”

The average rate for overnight federal funds, known as the fed effective rate, was 0.16 percent yesterday. That compares with the central bank’s target rate for overnight loans between banks of zero to 0.25 percent. The rate opened today at 0.17 percent today. The effective rate is a volume-weighted average of trades between major brokers for overnight funds, reported on a day lag by the Federal Reserve Bank of New York.

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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