Interbank dollar rates rose on Wednesday, prompted by renewed jitters about the financial system in the wake of new losses that may require more government funds to bolster the shaky sector. Market anxiety remained elevated about credit availability, a day after State Street Corp and Bank of New York Mellon Corp, two financial companies seen with stable core businesses, posted huge quarterly investment losses.
"People are very cautious at this point. People have positioned themselves defensively," said Deborah Cunningham, chief investment officer of money markets with Federated Investors Inc in Pittsburgh.
The overnight London interbank offered rate on the unsecured dollar rose to 0.18750 percent on Wednesday, the highest level since early December, while the benchmark three-month dollar Libor edged up to 1.12500 percent, not far above the 5-1/2-year low set last week.
In other signs of credit jitters, the rate on one-month Treasury bills fell close to zero and the spread on two-year dollar interest rate swaps grew to 67.25 basis points, a two-week wide. On the other side of the Atlantic, most bank-to-bank borrowing costs on euros and sterling fell as the European Central Bank introduced its latest measures to kick-start lending between institutions.
In an effort to encourage banks to lend to one another, the ECB returned to having a 2 percentage point gap between the interest rate commercial banks get when they deposit cash, and the rate they pay to borrow overnight. Despite the recent raft of bad news, borrowers with strong credit can still obtain short-term funds, analysts said.
The spread of three-month Libor over overnight indexed swap rates - and a gauge of banks' willingness to lend - was steady at 94 basis points, although the euro and sterling equivalent widened. Meanwhile, minutes from the Bank of England's January policy meeting showed the Monetary Policy Committee voted 8-1 for a 50 basis point cut to 1.5 percent.
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