Benchmark euro Libor rates hit record low

The interbank cost of borrowing three-month euros hit a record low on Wednesday after the European Central Bank lent nearly 450 billion euros in 1-year funds, providing a flood of excess liquidity to the market.
The cost of borrowing dollars also marked new lows before the conclusion of a US Federal Reserve meeting where the central bank is expected to hold its target for the federal funds rate - the rate banks charge each other for overnight loans - in the zero to 0.25 percent range.
The ECB said it will lend banks 442.24 billion euros ($612.8 billion) in its first one-year refinancing operation, marking its biggest ever liquidity injection and its latest step to get liquidity flowing in the wake of the financial crisis. Demand was above the expectations of traders in a Reuters poll, who forecast the ECB would allot 300 billion euros, and exceeds the previous record allotment of 348.6 billion in December 2007.
It is also significantly above the minimum required reserves that banks need to raise during the current maintenance period, by some 250 billion euros, according to Tullett Prebon's estimates, and the excess liquidity is likely to put downwards pressure on euro zone rates.
"This will put immediate downward pressure on short-end Eonia rates and drag three-month Euribor down towards the ECB's 1 percent refi rate level, though at a more gradual pace," said Tullett's head of G7 market economics Lena Komileva. The three-month London interbank offered rate for euros fell 2.6 basis points to 1.185 percent.
Overnight index swap rates (OIS) out to the three-month tenor marked new lows, short-dated bond yields also fell and Euribor rate futures rallied. Overnight Libor rates jumped, however, as banks which had scaled back participation in the ECB's weekly tender on Tuesday in anticipation of Wednesday's operation, sought cash to tide them over until the 1-year funds are transferred on Thursday.
The rate was fixed at 0.752 percent on Tuesday and it fell as low as 0.486 percent in May. The tender of 12-month funds slashed demand for the ECB's three-month funds and other shorter-term operations with banks taking just 6.4 billion euros in the ECB's latest three-month tender on Wednesday. London interbank offered rates on three-month dollars fell a third of a basis points to a record low of 0.60438 percent.