Bloomberg News

Dollar-Funding Stress Holds Steady, Money Market Indicators Show

January 18, 2013

Money-market forward indicators signaled short-term dollar funding conditions stayed steady.

The three-month London interbank offered rate, or Libor, which represents what banks say it would cost to borrow from one another, held at the lowest level since Aug. 18, 2011, 0.302 percent, for a second day, according to the British Bankers’ Association. The Libor-OIS spread, a gauge of banks reluctance to lend, was little changed at 16.4 basis points.

Overnight index swaps, or OIS, give traders predictions on what 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, fell to 19.3 basis points from 19.5 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 0.3 basis points to 13.8 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 rose $27.8 billion to $1.1328 trillion in the week ended Jan. 16, according to Fed data.

Euribor-OIS

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross currency swaps market increased. The three-month cross-currency basis swap was 17.6 basis points below Euribor, from 16.1 basis points below yesterday, its least since June 2011.

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, edged higher. The measure of banks’ reluctance to lend to one another was 10.9 basis points compared to 9.2 basis points.

Repo Rates

The overnight Treasury general collateral repurchase agreement rate opened today at 0.15 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 0.118 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.

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 0.14 percent yesterday. The rate opened today at 0.16 percent. 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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