Three-month bank borrowing costs fall

Bank-to-bank three-month dollar borrowing costs fell on Thursday, snapping a two-day rise, but money markets remain strained and fears about counterparty risk are not far beneath the surface. Governments and central banks are slowly paring back their huge injections of money into the banking system, made during the nearly two-year-old global financial crisis.
US COMMERCIAL PAPER MARKET SHRINKS, LOWEST SINCE 2001 Banks are gingerly lending to each other, but borrowing costs are above their historical norms, albeit dramatically lower than during the market panic of late 2008 after Lehman Brothers collapsed.
The storm of systemic contagion which this event and last-ditch government rescues of failing financial institutions unleashed on global markets has calmed considerably. But last year's financial markets tempest is being overshadowed by a deep economic crisis that is further denting banks' balance sheets and stalking short-term lending markets.
Federal Reserve data released on Thursday showed the US commercial paper market shrank to the lowest level outstanding in eight years, undermined by both the global credit crisis and the most prolonged US economic downturn in decades. For the week ended May 27, the size of the US commercial paper market fell by $35.9 billion to $1.248 trillion outstanding, the lowest since 2001, according to Reuters EcoWin data.
In interbank lending markets, three-month sterling funds edged up to 1.27813 percent from 1.27625 percent on Wednesday, according to Libor fixings from the British Bankers' Association. Libor or the London interbank borrowing rate is the leading global benchmark to which short-term borrowing costs are referenced.
However, dollar-denominated interbank lending rates slipped for the first time in two sessions. Three-month dollar-denominated Libor fell to 0.66750 percent on Thursday from 0.67375 percent on Wednesday, according to the latest daily fixing from the British Bankers' Association.
For the previous two days the dollar rate had edged higher. Interbank Libor rates' plunge to record lows since March had overreached as banks gradually reduced reliance on central bank funding facilities, some analysts said.
The modest rise in three-month dollar Libor rates this week was considered to be short term and primarily driven by technical factors, said Lena Komileva, head of G7 market economics at Tullett Prebon in London. Analysts expect Libor may now settle into a new range above key central bank lending rates that is higher than historical norms.
Before the global credit crunch started to unfold in summer 2007, the spread of 3-month Libor over the federal funds target rate - the key interbank lending rate the US central bank sets - was typically between about 12.5 and 25 basis points, noted Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co in New York.