Libor Jumps as Banks Seek Cash to Shore Up Finances (Update3)
By Gavin Finch and Kim-Mai Cutler
Sept. 24 (Bloomberg) -- Money-market interest rates increased as banks hoarded cash amid deepening concern that the U.S. government's plan to bail out financial institutions may get delayed.
The one-month London interbank offered rate, or Libor, that banks charge each other for loans in dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding euro and pound rates also rose, and yields on Treasury bills tumbled as investors fled all but the shortest-maturity government debt.
Banks are balking at lending to each other on speculation more institutions will fail following the collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. A $700 billion bank rescue plan from Treasury Secretary Henry Paulson has met resistance from Congressional Democrats and Republicans.
``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.''
Efforts by central banks to revive money markets with emergency cash auctions haven't worked. The Federal Reserve, European Central Bank and Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada to pump hundreds of billions of dollars into the financial system.
Year-End Demand
Typical demand for cash in the final months of the year, as banks seek to bolster their balance sheets before closing their books, is being exacerbated by concern that Paulson's proposals will get held up in Congress. One-month dollar Libor soared 40 basis points at the end of November as banks refused to lend funds for year-end.
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 31 basis points to 166 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.
The Treasury and Fed last week unveiled the $700 billion proposal to move troubled assets from the balance sheets of U.S. financial companies and put them in a new institution. Congressional leaders are weighing new strategies, including the possibility of approving only a $150 billion initial installment for the government to purchase the tainted securities.
`System Restructured'
``We're seeing the financial system being restructured before our eyes,'' said Peter Hahn, a London-based research fellow at Cass Business School and a former managing director at Citigroup Inc. ``We really have to accept the fact that the central banks are replacing the entire interbank market.''
Demand for euros at today's ECB 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.
The one-month Libor rate for euros rose 7 basis points today to 4.91 percent, and the pound rate also advanced 7 basis points, to 5.91 percent. The overnight rate for dollars doubled to 6.44 percent on Sept. 16 after the Lehman bankruptcy and AIG rescue.
Bill Yields Plunge
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.
Investors and traders around the world piled into the safest of government debt securities. Rates on three-month Treasury bills plunged to 0.43 percent from 0.72 percent. They fell to 0.02 percent on Sept. 17, the lowest since World War II, from 1.64 percent two weeks ago. Yields on longer-maturity bonds from the U.S., Europe and the U.K also declined.
The U.S. sold seven-day supplementary financing bills today at a high discount rate of 0.05 percent. That compares with 1.93 percent at a sale on July 8.
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 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 12:32 EDT
By Gavin Finch and Kim-Mai Cutler
Sept. 24 (Bloomberg) -- Money-market interest rates increased as banks hoarded cash amid deepening concern that the U.S. government's plan to bail out financial institutions may get delayed.
The one-month London interbank offered rate, or Libor, that banks charge each other for loans in dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. The corresponding euro and pound rates also rose, and yields on Treasury bills tumbled as investors fled all but the shortest-maturity government debt.
Banks are balking at lending to each other on speculation more institutions will fail following the collapse of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group Inc. A $700 billion bank rescue plan from Treasury Secretary Henry Paulson has met resistance from Congressional Democrats and Republicans.
``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.''
Efforts by central banks to revive money markets with emergency cash auctions haven't worked. The Federal Reserve, European Central Bank and Bank of Japan joined with counterparts in Switzerland, the U.K. and Canada to pump hundreds of billions of dollars into the financial system.
Year-End Demand
Typical demand for cash in the final months of the year, as banks seek to bolster their balance sheets before closing their books, is being exacerbated by concern that Paulson's proposals will get held up in Congress. One-month dollar Libor soared 40 basis points at the end of November as banks refused to lend funds for year-end.
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 31 basis points to 166 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.
The Treasury and Fed last week unveiled the $700 billion proposal to move troubled assets from the balance sheets of U.S. financial companies and put them in a new institution. Congressional leaders are weighing new strategies, including the possibility of approving only a $150 billion initial installment for the government to purchase the tainted securities.
`System Restructured'
``We're seeing the financial system being restructured before our eyes,'' said Peter Hahn, a London-based research fellow at Cass Business School and a former managing director at Citigroup Inc. ``We really have to accept the fact that the central banks are replacing the entire interbank market.''
Demand for euros at today's ECB 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.
The one-month Libor rate for euros rose 7 basis points today to 4.91 percent, and the pound rate also advanced 7 basis points, to 5.91 percent. The overnight rate for dollars doubled to 6.44 percent on Sept. 16 after the Lehman bankruptcy and AIG rescue.
Bill Yields Plunge
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.
Investors and traders around the world piled into the safest of government debt securities. Rates on three-month Treasury bills plunged to 0.43 percent from 0.72 percent. They fell to 0.02 percent on Sept. 17, the lowest since World War II, from 1.64 percent two weeks ago. Yields on longer-maturity bonds from the U.S., Europe and the U.K also declined.
The U.S. sold seven-day supplementary financing bills today at a high discount rate of 0.05 percent. That compares with 1.93 percent at a sale on July 8.
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 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 12:32 EDT
