Bank lending rates in US dollars rise again

Bank lending rates in US dollars rose again on Wednesday, extending a three-week climb that reflected both uncertainty about the banking sector and cautious optimism toward battered credit markets. There is great uncertainty surrounding the shape of the eventual bailout package from Washington. Some analysts worry the possible creation of a "bad bank" that would house loss-ridden bank assets could hurt more than help.
"The creation of a 'bad bank' drastically increases the likelihood of more bank failures in the short term," said Peter Chatwell, a market analyst at Calyon in London. "If the toxic assets are bought at too low a price, some banks will fail. Despite officials stating otherwise, the rumours of a bad bank are not yet disappearing."
Such concerns helped push the three-month London Interbank Offered Rate, known as Libor, to its current 1.235 percent, up from 1.082 percent seen as recently as mid-January. Still, there were inklings of a thaw in credit markets, as evidenced by a rise in Treasury bill rates that suggests investors are not quite as panicked as they were late last year.
This was also pushing up Libor rates, said analysts, because it allowed financial institutions to issue debt in longer maturities, filling the gap that had for some time been left to the central bank. Investors cite the Federal Deposit Insurance Corporation's debt guarantee program as enhancing liquidity in impaired debt markets.
One important signal was reduced volatility in the tradeable federal funds target rates, whose daily trading range was at its smallest since the crisis began. In addition the TED spread, an indicator of risk-aversion that measures the gap between three-month bills and three-month Libor, was now near its narrowest levels since June.
"It's a healthy sign that the market has new options," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts. Yet the positive signs were tentative to say the least, especially given speculation about what Washington's $800 billion-plus stimulus package will look like.
Financier George Soros railed against the idea of a bad bank in the Wall Street Journal on Wednesday. In contrast to its dollar counterpart, euro-denominated Libor rates eased again overnight to 2.051 percent. That rate has been on a steep decline for three months, in line with rate cuts from the European Central Bank and expectations for more. The ECB meets on Thursday but many believe it would pause its rate-cutting streak before resuming it later in March.