Libor Jumps as Banks Seek Cash to Shore Up Finances (Update1)
By Gavin Finch and Kim-Mai Cutler
Sept. 24 (Bloomberg) -- Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won't happen quickly enough to ease short-term funding constraints.
The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding rate in euros rose 7 basis points to 4.91 percent and the pound rate also advanced 7 basis points, to 5.91 percent.
``There's no real term funding markets except for central banks,'' said Meyrick Chapman, a fixed-income strategist in London at UBS AG. ``The Libor is meaningless. It's for unsecured lending and there is no unsecured lending as far as I can see.''
Money markets have frozen since the collapse of the U.S. housing market more than a year ago. Efforts by the Federal Reserve, along with central banks worldwide, to revive lending through emergency cash auctions have failed as banks hoard cash and balk at lending to each other on concern more institutions will go bankrupt.
The collapse of Lehman Brothers Holdings Inc. and the U.S. government's takeover of insurer American International Group Inc. last week sent the overnight rate for dollars to 6.44 percent on Sept. 16, double the rate of the previous day.
The Treasury and Fed last week unveiled a $700 billion plan to move troubled assets from the balance sheets of U.S. financial companies and put them in a new institution.
Record Cash Demand
Demand for euros at today's European Central Bank auction of three-month loans was the strongest on record, while banks paid a record premium for dollar loans at yesterday's Fed sale.
The ECB allotted 50 billion euros ($73.3 billion) at a marginal rate of 4.98 percent. That's the highest since 2000. Banks bid for 155 billion euros. Banks paid 3.75 percent at yesterday's 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December.
Libor loans aren't secured and typically command rates above those of secured loans of similar maturities.
``We've seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday's one-month Libor will no doubt add to that,'' said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country's second-biggest bank.
Libor-OIS Widens
The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 30 basis points to 165 basis points today, the highest level since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
To help ease the gridlock in dollar funding, the Fed arranged $30 billion in swap lines today with central banks in Norway, Sweden, Denmark and Australia.
The Fed, the ECB and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada last week to pump hundreds of billions of dollars into the financial system.
The world's biggest financial companies posted $522 billion in subprime-related losses and writedowns since the start of last year. That's more than last year's gross domestic product of Ireland and Finland combined, according to data compiled by Bloomberg.
To contact the reporters on this story: Gavin Finch in London at [email protected]; Kim-Mai Cutler in London at [email protected]
Last Updated: September 24, 2008 09:07 EDT
By Gavin Finch and Kim-Mai Cutler
Sept. 24 (Bloomberg) -- Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won't happen quickly enough to ease short-term funding constraints.
The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding rate in euros rose 7 basis points to 4.91 percent and the pound rate also advanced 7 basis points, to 5.91 percent.
``There's no real term funding markets except for central banks,'' said Meyrick Chapman, a fixed-income strategist in London at UBS AG. ``The Libor is meaningless. It's for unsecured lending and there is no unsecured lending as far as I can see.''
Money markets have frozen since the collapse of the U.S. housing market more than a year ago. Efforts by the Federal Reserve, along with central banks worldwide, to revive lending through emergency cash auctions have failed as banks hoard cash and balk at lending to each other on concern more institutions will go bankrupt.
The collapse of Lehman Brothers Holdings Inc. and the U.S. government's takeover of insurer American International Group Inc. last week sent the overnight rate for dollars to 6.44 percent on Sept. 16, double the rate of the previous day.
The Treasury and Fed last week unveiled a $700 billion plan to move troubled assets from the balance sheets of U.S. financial companies and put them in a new institution.
Record Cash Demand
Demand for euros at today's European Central Bank auction of three-month loans was the strongest on record, while banks paid a record premium for dollar loans at yesterday's Fed sale.
The ECB allotted 50 billion euros ($73.3 billion) at a marginal rate of 4.98 percent. That's the highest since 2000. Banks bid for 155 billion euros. Banks paid 3.75 percent at yesterday's 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December.
Libor loans aren't secured and typically command rates above those of secured loans of similar maturities.
``We've seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday's one-month Libor will no doubt add to that,'' said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country's second-biggest bank.
Libor-OIS Widens
The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 30 basis points to 165 basis points today, the highest level since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
To help ease the gridlock in dollar funding, the Fed arranged $30 billion in swap lines today with central banks in Norway, Sweden, Denmark and Australia.
The Fed, the ECB and the Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada last week to pump hundreds of billions of dollars into the financial system.
The world's biggest financial companies posted $522 billion in subprime-related losses and writedowns since the start of last year. That's more than last year's gross domestic product of Ireland and Finland combined, according to data compiled by Bloomberg.
To contact the reporters on this story: Gavin Finch in London at [email protected]; Kim-Mai Cutler in London at [email protected]
Last Updated: September 24, 2008 09:07 EDT
