Interbank rates stay higher

Interbank lending rates for three-month dollar funds rose for the second straight day on Friday and spreads widened, suggesting that the recent improvement in money market conditions is fading. The bank-to-bank cost of lending dollars chalked up its biggest rise in over a month, and a range of spreads which measure the cost to banks and corporations of raising dollar funding widened.
Three-month dollar London interbank offered rates rose more than 8 basis points to 2.23625 percent, the biggest rise since October 10. Thursday's increase broke a streak of 23 consecutive declines. The spread between three-month Libor and market expectations of official policy rates, as measured by Overnight Index Swaps, widened by 7 basis points to 170 basis points. A wider spread indicates reluctance of banks to lend and increasing stress in the broader financial system.
These moves underscored the increased anxiety in financial markets since US Treasury Secretary Henry Paulson said on Wednesday the Troubled Asset Relief Program (TARP) would no longer focus on buying up toxic mortgage assets. Comparable sterling spreads widened on Friday to 215 basis points and euro spreads narrowed by around 5 basis points.
The increase in dollar Libor at the British Bankers' Association's daily fixing on Friday was broad-based, across the maturities curve from overnight to a year. Longer-term funding costs rose most, with one-year dollar Libor up over 15 basis points to 2.90500 percent.
By contrast, sterling and euro Libor rates fell, albeit at a modest rate. Benchmark euro Libor has fallen for 27 consecutive sessions and sterling has fallen for 25. The market grew $2.9 billion to $1.603 trillion in the week to November 12, compared with a $50.5 billion increase the previous week and $100.5 billion the week before that.
The spread of two-year US interest rate swaps over comparable Treasury note yields widened 7 basis points to 117 basis points. Earlier this week it had dipped below 100 basis points. The gap between three-month dollar Libor over T-bill yields, the so-called TED spread, widened back slightly to over 200 basis points.
Fed Chairman Ben Bernanke said on Friday that stresses remain despite cuts in global interest rates and myriad operations from central banks and finance departments around the world to shore up the banking system. The ECB said on Friday that overnight deposits rose, as banks continued to hoard rather than lend cash. Banks deposited 127.566 billion euros at the ECB, up from 103.318 billion the day before.