Dollar money-market rates fell after the European Central Bank, Bank of England and Swiss National Bank offered lenders unlimited US currency for the first time in a coordinated effort to unlock credit markets.
The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped for a third day, its longest sequence of declines in seven weeks, according to the British Bankers’ Association. It slid 9 basis points to 4.55 per cent today. The comparable euro rate declined to 5.18 per cent. Asian rates also decreased.
“Government participation in the banks along with the huge liquidity operation is flooding the financial system, which is having the desired effect on Libor,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking arm of Credit Agricole SA.
The freeze in money markets may be thawing as governments earmark as much as $3 trillion to revive bank lending. Libor is used to set the rates on financial contracts linked to $360 trillion, or $53,500 for each person worldwide, including mortgages in Britain, student loans in the US and the debt of companies around the world.
The Frankfurt-based ECB lent banks $170.9 billion for seven days at a fixed rate of 2.28 per cent, 180 basis points less than yesterday’s comparable Libor. The Bank of England allotted $76.3 billion and the Swiss central bank $7.1 billion at the same rate, also for a week. Separately, the ECB provided $100 billion in overnight cash at 0.5 per cent, 100 basis points below the Federal Reserve’s target rate of 1.5 per cent.
The one-week dollar rate fell 25 basis points to 3.83 per cent.
US Injection: The US said yesterday it will inject $250 billion into banks through preferred stock purchases, with nine already agreeing to participate in the program, as it seeks to reverse a collapse in trust among institutions that is blocking lending. Treasury Secretary Henry Paulson urged financial institutions to start offering cash again to prevent further company failures.
While the cost of three-month dollar loans has dropped in the wake of the measures, it’s still 305 basis points more than the Fed’s target rate. The difference was a record 332 basis points on October 10. It was 82 basis points on September 15, the day Lehman Brothers Holdings Inc filed for bankruptcy and 11 basis points on July 31, 2007, just before the start of the credit squeeze.
‘Sentiment Changing’: “Sentiment is changing in money markets,” said Tomohiko Katsu, deputy general manager of capital markets at Shinsei Bank Ltd. in Tokyo. “But it’s still fragile.”
Libor, set every morning by the BBA, an unregulated group representing UK banks, is a barometer of the freeze in credit markets because it reflects financial institutions’ willingness to lend to one another.
The three-month rate for dollars has risen about 3 basis points since October 8, when the Fed joined with central banks around the world to cut benchmark interest rates by 50 basis points.
Financial institutions are charging each other a premium of about 333 basis points over what traders predict the Fed’s daily effective federal funds rate will average over the next three months to lend cash. The so-called Libor-Overnight Indexed Swap, or Libor-OIS, spread is up from about 24 basis points in January and 11 basis points in the 10 years prior to August 2007, before the start of the credit squeeze.
Former Fed Chairman Alan Greenspan said in June that the Libor-OIS spread should serve as a measure for telling when markets have returned to normal.
Libor-OIS Futures: Futures trading shows the spread may stay above its long-term average for at least the next two years, signaling banks will remain hesitant to lend, according to Tullett Prebon Plc data.
Predictions based on contracts trading in the forwards market, or so-called FRA/OIS spreads, are at 149 basis points for December and about 90 basis points for March. The spread priced to September 2010, as far out as Tullett Prebon provides data, is 32 basis points.
In another sign that banks remain wary, financial institutions deposited a record amount of cash with the ECB overnight. Banks lodged ¤196.1 billion ($267 billion) in the ECB’s deposit facility at a rate of 3.25 per cent, up from ¤182.8 billion on October 13. They also borrowed ¤19.6 billion from the ECB at the emergency overnight marginal rate of 4.25 per cent compared with ¤17.5 billion a day earlier.
The credit crisis has thrown the spotlight on Libor because the BBA publishes the names of contributors and their rates, giving lenders an incentive to underestimate borrowing costs to keep from appearing like they are in financial straits. The Bank for International Settlements said in March that some lenders may have “manipulated” rates.
Asian Rates: Asian rates fell today after Japan pledged to offer as much dollar funding as required and the Hong Kong Monetary Authority said it will use its foreign-exchange reserves to guarantee bank deposits. Hong Kong’s three-month interbank lending rate, or Hibor, fell 9 basis points to 4.34 per cent today, the lowest in the past week. Japan’s overnight call rate dropped 10 basis points to 0.30 per cent, below its target for a third day.
Yields on overnight US commercial paper, which companies sell to help pay for day-to-day expenses such as payroll and rent, fell for a second day, sliding 20 basis points to 1.52 percent, the lowest since September 26, according to data compiled by Bloomberg.
In a bid to free up corporate borrowing, the Fed said it may help America’s companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market.