NEW YORK: The scramble among banks for US dollars cooled a bit on Monday as a closely watched gauge on what they charge each other to borrow greenbacks for three months posted its biggest single-day fall in more than seven weeks.
The London interbank offered rate on three-month dollars , or Libor, had risen as some US prime money market funds have changed over to hold only government bonds, which are exempt from rules from the US Securities and Exchange Commission that will take effect this autumn.
Prime money funds have been reducing their holdings of commercial paper and other short-term debt from banks, which analysts blame for pushing up Libor. They have been adding more Treasury bills and other low-risk government paper in anticipation of a surge in redemptions from large investors ahead of the SEC rule changes.
"Once the year is over, you should have less uncertainty with money fund managers about how much cash they need to have on hand," said Karl Haeling, vice president at Landesbank Baden-Wurttemburg in New York.
Reduced demand from prime money funds for commercial paper and other short-term debt from banks propelled the Libor to its highest level in more than seven years on Friday.
Three-month Libor was fixed on Monday at 0.80411, its lowest level in more than a week. Friday's 0.81825 percent was its highest since May 2009. Libor is a benchmark for more than $300 trillion worth of financial products worldwide.
Monday's fixing on three-month reflected banks' expectations of lower borrowing costs once the SEC rules take effect. On Oct. 14, the SEC will require prime money funds used by institutional investors to float their per-share net asset value or impose limits and liquidity fees on redemptions in times of market stress, which investors dislike.
This final phase of money fund reform is intended to safeguard a sector that was rattled by the collapse of Lehman Brothers during the global credit crunch in September 2008.
While conversion to government-only funds will probably slow by mid-October, it is unclear how many more prime funds will make the move, analysts said.
Analysts estimated another $400 billion to $500 billion in prime fund assets might convert to government-only assets between now and October, keeping Libor at elevated levels.
One-month dollar Libor edged up to 0.50744 percent on Monday from Friday's 0.50665 percent but remained below a seven-plus year high of 0.51765 percent reached last week.
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