The interbank cost of borrowing dollar, euro and sterling funds mostly fell on Wednesday, according to the daily fixing from the British Bankers' Association, but banks remained reluctant to lend among themselves.
With bourses falling and two-year interest rate-sensitive euro zone government bond yields falling to levels not seen since at least 1990, risk aversion remained on the cards, albeit less than at the heady levels seen in 2008.
In Asia overnight, US dollar interbank rates and lending spreads narrowed even though it appeared the easing in money markets seen in the previous quarter might be reaching a limit.
A poorly received 10-year Bund auction on Wednesday fuelled a widening of the 2-10 year debt yield spread to 152 basis points - not seen since September 2004. Three-month dollar rates were fixed at 1.39750 percent, down from 1.41125 percent on Tuesday, while the equivalent euro and sterling rates also eased.
"Still seeing the same improvements coming through in the Libors with corporates and money managers lending fairly well up to about three month maturities but not so easily beyond that," said David Keeble, head of income strategy at Calyon in London.
"Interbank activity remains fairly subdued. There is stuff going through in the interbank market, but still small amounts and rarely beyond a month," he added. The collapse of major entities such as Lehman Brothers last year dealt a severe blow to confidence among banks, heightening distrust and causing lending between financial institutions to grind to a halt.
Since then, central banks around the world have funnelled cash to banks and introduced measures like guaranteeing their debt, helping to calm the interbank money market.
The big issue this year is whether banks will start lending to each other again without central bank assistance. So far, the central banks are assisting. The European Central Bank and Bank of England were back in the market offering liquidity one day before a likely cut in UK interest rates of at least 50 basis points to a record low of 1.5 percent.
"It's complicated because of the additional possibility of quantitative easing announcements, but it looks as though 50 basis points is roughly priced in. I don't think it's likely to be more," said Calyon's Keeble. The ECB lent 7.559 billion euros in 182-day paper. The eurozone's central bank also conducted an auction of 98-day paper, and lent 9.454 billion euros-worth.
As with Libor, so with Euribor. Benchmark bank-to-bank euro lending rates fell further on Wednesday, hitting a new 2-1/2 year low as money markets continued to factor in the prospects for further interest rate cuts from the ECB. "The downward trend in three-month Euribor, roughly about 3 bps per day, is still firmly in place and should continue," said David Schnautz, a bond analyst at Commerzbank in Frankfurt. In other operations, the Bank of England received 1.24 times the 20 billion pounds-worth of three-month money funds available in an auction.
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