Libor Falls Below 1% for First Time as Credit Thaws (Update2)
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By Anna Rascouet
May 5 (Bloomberg) -- The London interbank offered rate that banks charge for three-month dollar loans fell below 1 percent for the first time as credit markets showed signs of thawing.
Libor declined two basis points to 0.99 percent today, according to the British Bankers’ Association. The previous all- time low was 1 percent, reached in June 2003. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed today to the lowest level since Sept. 1.
Libor, which reached 4.82 percent following the collapse of Lehman Brothers Holdings Inc. in September, tumbled after the Federal Reserve and the U.S. government provided $12.8 trillion to bail out the banking system and spur lending. The rate, set by the BBA in London, determines borrowing costs on about $360 trillion of financial products worldwide, ranging from home mortgages to corporate bonds.
“Confidence is returning to the market, so I would say so far so good,” said Brian Delany, a money-market trader on the dollar desk at Bank of Ireland Plc in Dublin. “But it’s about being consistent.”
The declines in Libor signal efforts by Fed Chairman Ben Bernanke and other central bankers to revive lending may be bearing fruit. Companies sold about $477 billion of bonds this year in the U.S., compared with $354 billion during the same period of 2008, according to data compiled by Bloomberg. Rates on 30-year fixed mortgages averaged 1.76 percentage points more than 10-year Treasuries last week, down from 3.07 points on Dec. 19, the highest level since 1986.
Stress Tests
The Fed will deliver the results of the stress tests today to the executives of the 19 U.S. banks it reviewed following a surge in losses and writedowns at financial institutions around the world. The tests may show 10 lenders will need to raise more capital to withstand a deeper recession, according to people familiar with the matter.
After getting billions in government funds, banks will “look more like what preceded the current environment than many people seem to believe,” H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell LLP, said in a Bloomberg News panel discussion in New York yesterday.
Financial institutions posted almost $1.4 trillion in writedowns and losses since August 2007, when banks became reluctant to lend to each other following the collapse in the U.S. subprime-mortgage market. UBS AG, the European bank with the biggest writedowns, said today capital grew more rapidly than it estimated even as it reported a first-quarter loss.
‘Bodes Well’
“There has been a decrease in credit concerns about banks due to better-than-expected first-quarter results,” Piyush Goyal, a fixed-income strategist at Barclays Capital Inc. in New York, wrote today in a note to clients “All this bodes well for Libor and it will likely drift lower.”
Accelerated declines in interbank rates led JPMorgan Chase & Co. to lower its forecasts last week. The three-month Libor will drop to 0.75 percent by mid-year and the Libor-OIS spread will narrow to 50 basis points, down from previous expectations of 1 percent and 75 basis points, respectively, the bank said.
There is an “improvement in tone of the funding markets and the technical dynamics in money-market supply,” JPMorgan New York-based strategists Alex Roever and Cie-Jai Brown wrote in a May 1 research note.
Though U.S. plans to finance the purchase of as much as $1 trillion in illiquid assets from banks have helped ease strains in money markets, three-month dollar Libor is still 74 basis points above the upper end of the Fed’s target interest rate. The average was 22 basis points in the five years before the start of the credit crisis.
Libor-OIS
The Libor-OIS spread dropped to 78 basis points today, compared with an average of 26 basis points in the five years preceding the crisis. The spread, the premium banks charge over what traders predict the Fed’s daily effective federal funds rate will average over the next three months, was as high as 364 basis points in October.
Former Fed Chairman Alan Greenspan said in June last year that he wouldn’t consider credit markets to be back to “normal” until Libor-OIS falls to 25 basis points.
The BBA asks member banks each day how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about noon in London.
HSBC Bank Plc submitted the lowest rate for three-month loans in dollars today, at 0.90 percent. Royal Bank of Scotland Group Plc quoted the highest, at 1.09 percent.
To contact the reporter on this story: Anna Rascouet in London at [email protected]
Last Updated: May 5, 2009 11:15 EDT
Share | Email | Print | A A A
By Anna Rascouet
May 5 (Bloomberg) -- The London interbank offered rate that banks charge for three-month dollar loans fell below 1 percent for the first time as credit markets showed signs of thawing.
Libor declined two basis points to 0.99 percent today, according to the British Bankers’ Association. The previous all- time low was 1 percent, reached in June 2003. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed today to the lowest level since Sept. 1.
Libor, which reached 4.82 percent following the collapse of Lehman Brothers Holdings Inc. in September, tumbled after the Federal Reserve and the U.S. government provided $12.8 trillion to bail out the banking system and spur lending. The rate, set by the BBA in London, determines borrowing costs on about $360 trillion of financial products worldwide, ranging from home mortgages to corporate bonds.
“Confidence is returning to the market, so I would say so far so good,” said Brian Delany, a money-market trader on the dollar desk at Bank of Ireland Plc in Dublin. “But it’s about being consistent.”
The declines in Libor signal efforts by Fed Chairman Ben Bernanke and other central bankers to revive lending may be bearing fruit. Companies sold about $477 billion of bonds this year in the U.S., compared with $354 billion during the same period of 2008, according to data compiled by Bloomberg. Rates on 30-year fixed mortgages averaged 1.76 percentage points more than 10-year Treasuries last week, down from 3.07 points on Dec. 19, the highest level since 1986.
Stress Tests
The Fed will deliver the results of the stress tests today to the executives of the 19 U.S. banks it reviewed following a surge in losses and writedowns at financial institutions around the world. The tests may show 10 lenders will need to raise more capital to withstand a deeper recession, according to people familiar with the matter.
After getting billions in government funds, banks will “look more like what preceded the current environment than many people seem to believe,” H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell LLP, said in a Bloomberg News panel discussion in New York yesterday.
Financial institutions posted almost $1.4 trillion in writedowns and losses since August 2007, when banks became reluctant to lend to each other following the collapse in the U.S. subprime-mortgage market. UBS AG, the European bank with the biggest writedowns, said today capital grew more rapidly than it estimated even as it reported a first-quarter loss.
‘Bodes Well’
“There has been a decrease in credit concerns about banks due to better-than-expected first-quarter results,” Piyush Goyal, a fixed-income strategist at Barclays Capital Inc. in New York, wrote today in a note to clients “All this bodes well for Libor and it will likely drift lower.”
Accelerated declines in interbank rates led JPMorgan Chase & Co. to lower its forecasts last week. The three-month Libor will drop to 0.75 percent by mid-year and the Libor-OIS spread will narrow to 50 basis points, down from previous expectations of 1 percent and 75 basis points, respectively, the bank said.
There is an “improvement in tone of the funding markets and the technical dynamics in money-market supply,” JPMorgan New York-based strategists Alex Roever and Cie-Jai Brown wrote in a May 1 research note.
Though U.S. plans to finance the purchase of as much as $1 trillion in illiquid assets from banks have helped ease strains in money markets, three-month dollar Libor is still 74 basis points above the upper end of the Fed’s target interest rate. The average was 22 basis points in the five years before the start of the credit crisis.
Libor-OIS
The Libor-OIS spread dropped to 78 basis points today, compared with an average of 26 basis points in the five years preceding the crisis. The spread, the premium banks charge over what traders predict the Fed’s daily effective federal funds rate will average over the next three months, was as high as 364 basis points in October.
Former Fed Chairman Alan Greenspan said in June last year that he wouldn’t consider credit markets to be back to “normal” until Libor-OIS falls to 25 basis points.
The BBA asks member banks each day how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about noon in London.
HSBC Bank Plc submitted the lowest rate for three-month loans in dollars today, at 0.90 percent. Royal Bank of Scotland Group Plc quoted the highest, at 1.09 percent.
To contact the reporter on this story: Anna Rascouet in London at [email protected]
Last Updated: May 5, 2009 11:15 EDT
