Interbank costs fall further

Interbank costs fell further in Europe on Thursday, reflecting continuing easing tensions in global money markets and as risk appetite perked up on optimism of a recovery in US consumer spending. The benchmark three-month London Interbank Offered Rate on dollars fell for a 10th straight session to 1.13125 percent, its lowest since late January.
The spread between three-month dollar Libor and Overnight Indexed Swap (OIS) rate, the markets expected Fed policy rate in three months, narrowed a touch to 93 basis points. This spread, which shrinks with improved risk appetite, has hovered near its tightest since late January. Equivalent spreads for euros and sterling also pinched in slightly.
"The general trend is that the spreads are tightening and the general banking risk has come down tremendously in recent months," said Kornelius Purps, fixed income strategist at UniCredit in Munich. Market players noted that corporate defaults and unemployment might be rising, the real economy in bad shape and credit transmission broken but there was some confidence that no bank would fail because of government pledges that every bank will be rescued.
In a sign of the improvement in money markets, commercial banks overnight deposits at the European Central Bank fell to the lowest since September, data showed on Thursday. The ECB also said banks borrowed 895 million euros from its overnight lending facility, compared with 4.814 billion euros taken previously. ECB President Jean-Claude Trichet was quoted on Thursday as saying that the bank still had some leeway to cut its refinancing rate again from the current record low.
Three-month euro Libor rates marked their lowest in the currencys lifetime at 1.42813 percent on Thursday. Meanwhile, Aussie bill futures jumped on Thursday as investors priced in more rate cuts after unemployment surged to a 5-year high, while South Korea interest rate swaps rose after the central bank said its economic downturn was moderating. Australian employment slid by more than expected in March, and is expected to sustain the pressure for yet more monetary and fiscal stimulus.
"This data is another confirmation Australia is in a deepening recession. The key features of recession are falling full time employment and rising unemployment," said Rory Robertson, interest rate strategist with Macquarie. Bill futures jumped as investors priced in a greater chance of further cuts in interest rates by the Reserve Bank of Australia (RBA), following its quarter-point cut to 3.0 percent this week.