Libor Slides as Fed Offers Cash to Mutual Funds; CP Yields Drop
By Gavin Finch and Candice Zachariahs
Oct. 22 (Bloomberg) -- The cost of borrowing in dollars in London for three months fell for an eighth day, the longest run of declines since May, after the Federal Reserve made as much as $540 billion available to mutual funds to resuscitate lending.
The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 29 basis points to 3.54 percent, the British Bankers' Association said. The overnight dollar rate slid to 1.12 percent, the lowest level since June 2004. Rates on 30-day company debt dropped the most on record.
``The funding situation has improved and will probably continue to improve, but what will surprise is the length of time it will take,'' said Patrick Bennett, a currency strategist at Societe Generale SA in Hong Kong.
Credit markets froze after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, prompting governments and policy makers worldwide to bail out banks and inject cash into money markets to revive lending. The Fed yesterday invoked emergency authority to buy assets from money-market mutual funds that are having difficulty meeting redemptions. The initiative is the third government effort to help the funds, which provide a key source of financing for banks and companies.
The Fed announcement helped send quoted yields on the highest-ranked 30-day commercial paper down 146 basis points to 1.93 percent today, the lowest level in four years, according to data compiled by Bloomberg. Commercial paper is used by companies to cover day-to-day expenses such as payroll and rent.
Asian Rates
Rates in Asia fell. The three-month interbank lending rate, or Hibor, for Hong Kong dollars dropped for a fourth day, sliding 21 basis points to 3.14 percent, the lowest level since Sept. 22.
Interbank rates have retreated after policy makers in Europe and Japan offered lenders unlimited dollar funding. The European Central Bank today provided euro-region banks with as much U.S. currency as required, allotting $68 billion of seven- day cash at a fixed rate of 2.03 percent. It supplied a further $3.85 billion, also for seven days, via a currency swap against euros.
Libor is set by a panel of banks in a daily survey by the British Bankers' Association at about noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms from a day to a year. About $360 trillion of financial products worldwide, from mortgages to company loans and derivatives, is tied to the Libor.
`Positive Impact'
The ECB, Bank of Japan and Bank of England yesterday allotted $178 billion at a fixed rate of 2.11 percent in tandem with the Fed.
``Financial markets will stabilize overall because the coordinated measures of the past weeks will show a positive impact,'' ECB council member Ewald Nowotny said in an interview with Austria's Falter magazine, published today. ``There can still be setbacks, but I believe that the turning point has been reached.''
While money-market rates have declined, the three-month Libor is still 204 basis points more than the Fed's target rate for overnight loans of 1.5 percent and up from 120 basis points about a month ago. At the start of the year, the spread was 43 basis points.
Today's decline in the overnight rate left it 38 basis points below the Fed's target as speculation mounted policy makers will enact a half-point cut on Oct. 29. It only been below the Fed's main rate on three occasions since Sept. 14, 2007.
`Age of Innocence'
Bank of England Governor Mervyn King yesterday cautioned against expecting borrowing conditions to improve to levels experienced before the credit freeze.
``The age of innocence, when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates, will not quickly, if ever, return,'' he said in a speech. ``I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks.''
The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was at 250 basis points today, down from 434 basis points a week ago.
The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, narrowed to 250 basis points for the first time since Sept. 30. It was at 364 basis points on Oct. 10. A basis point is 0.01 percentage point.
Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate during the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.
The financial crisis will cut growth in credit this year by 50 percent as financial firms reduce leverage, investors' appetite for risk declines and the worldwide economy slows, Fitch Ratings said in a report yesterday.
To contact the reporters on this story: Gavin Finch in London at [email protected]; Candice Zachariahs in Sydney at [email protected]
Last Updated: October 22, 2008 11:17 EDT
By Gavin Finch and Candice Zachariahs
Oct. 22 (Bloomberg) -- The cost of borrowing in dollars in London for three months fell for an eighth day, the longest run of declines since May, after the Federal Reserve made as much as $540 billion available to mutual funds to resuscitate lending.
The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 29 basis points to 3.54 percent, the British Bankers' Association said. The overnight dollar rate slid to 1.12 percent, the lowest level since June 2004. Rates on 30-day company debt dropped the most on record.
``The funding situation has improved and will probably continue to improve, but what will surprise is the length of time it will take,'' said Patrick Bennett, a currency strategist at Societe Generale SA in Hong Kong.
Credit markets froze after the collapse of Lehman Brothers Holdings Inc. on Sept. 15, prompting governments and policy makers worldwide to bail out banks and inject cash into money markets to revive lending. The Fed yesterday invoked emergency authority to buy assets from money-market mutual funds that are having difficulty meeting redemptions. The initiative is the third government effort to help the funds, which provide a key source of financing for banks and companies.
The Fed announcement helped send quoted yields on the highest-ranked 30-day commercial paper down 146 basis points to 1.93 percent today, the lowest level in four years, according to data compiled by Bloomberg. Commercial paper is used by companies to cover day-to-day expenses such as payroll and rent.
Asian Rates
Rates in Asia fell. The three-month interbank lending rate, or Hibor, for Hong Kong dollars dropped for a fourth day, sliding 21 basis points to 3.14 percent, the lowest level since Sept. 22.
Interbank rates have retreated after policy makers in Europe and Japan offered lenders unlimited dollar funding. The European Central Bank today provided euro-region banks with as much U.S. currency as required, allotting $68 billion of seven- day cash at a fixed rate of 2.03 percent. It supplied a further $3.85 billion, also for seven days, via a currency swap against euros.
Libor is set by a panel of banks in a daily survey by the British Bankers' Association at about noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms from a day to a year. About $360 trillion of financial products worldwide, from mortgages to company loans and derivatives, is tied to the Libor.
`Positive Impact'
The ECB, Bank of Japan and Bank of England yesterday allotted $178 billion at a fixed rate of 2.11 percent in tandem with the Fed.
``Financial markets will stabilize overall because the coordinated measures of the past weeks will show a positive impact,'' ECB council member Ewald Nowotny said in an interview with Austria's Falter magazine, published today. ``There can still be setbacks, but I believe that the turning point has been reached.''
While money-market rates have declined, the three-month Libor is still 204 basis points more than the Fed's target rate for overnight loans of 1.5 percent and up from 120 basis points about a month ago. At the start of the year, the spread was 43 basis points.
Today's decline in the overnight rate left it 38 basis points below the Fed's target as speculation mounted policy makers will enact a half-point cut on Oct. 29. It only been below the Fed's main rate on three occasions since Sept. 14, 2007.
`Age of Innocence'
Bank of England Governor Mervyn King yesterday cautioned against expecting borrowing conditions to improve to levels experienced before the credit freeze.
``The age of innocence, when banks lent to each other unsecured for three months or longer at only a small premium to expected policy rates, will not quickly, if ever, return,'' he said in a speech. ``I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks.''
The difference between what banks and the U.S. Treasury pay to borrow for three months, the so-called TED spread, was at 250 basis points today, down from 434 basis points a week ago.
The Libor-OIS spread, which measures the difference between the three-month dollar rate and the overnight indexed swap rate, narrowed to 250 basis points for the first time since Sept. 30. It was at 364 basis points on Oct. 10. A basis point is 0.01 percentage point.
Overnight indexed swaps are over-the-counter traded derivatives in which one party agrees to pay a fixed rate in exchange for the average of a floating central-bank rate during the life of the swap. For dollar swaps, the floating rate is the daily effective federal funds rate.
The financial crisis will cut growth in credit this year by 50 percent as financial firms reduce leverage, investors' appetite for risk declines and the worldwide economy slows, Fitch Ratings said in a report yesterday.
To contact the reporters on this story: Gavin Finch in London at [email protected]; Candice Zachariahs in Sydney at [email protected]
Last Updated: October 22, 2008 11:17 EDT
